Lira Reversing Rate Hike Gains

One week on from the dramatic 4.75% CBRT interest rate hike, which took rates back up to 15%, USDTRY is still above where it was before the CBRT announced the move. The CBRT announced the move in a bid to tackle double digit inflation and said it hoped the “transparent and strong” move would also help turn the tide of the trend of dollarization which has taken hold on the country’s economy as well as help replenish lacklustre FX reserves.

New Economic Era

The rate hike was the largest of its kind in two years and comes in the wake of president Erdogan installing a new governor and announcing a new economic plan to help get the country back on track following several years of spiralling inflation and TRY depreciation. The CBRTS’s new governor Naci Agbal assured markets that “The tightness of monetary policy will be decisively sustained until a permanent fall in inflation is achieved.” In light of the dramatic move and the assurances offered by the new governor, the market is expecting further such action. However, given the short live impact in the exchange rate, there are question over how effect this method is.

Battle Between Locals & Foreigners

The Lira rose more than 12% against the Dollar in reaction to Erdogan announcing a new CBRT governor and a new economic era for the country. However, the Turkish currency now finds itself between a rock and a hard place or, more specifically, between foreign investors and locals. Reports highlights that foreign investors bought around $5 billion of Turkish assets in the week following the rate hike, driving the Lira higher. However, during the same week, locals bought around $2.5 billion in hard currencies, which were seen at a discounted rate due to the rise in try. Latest reports indicate that FX holdings in the country are at record highs of $228 billion, once of the big drivers has been the more than $20 billion in gold imports.

Looking ahead, markets are anticipating a further rate hike in the coming months in a bid to sustain foreign inflows which can help reduce the country’s current account deficit which has been heavily hit by the lack of tourism revenues this year, leaving a $20 billion hole.

Technical Views

USDTRY

Following the bounce of the long-term bullish trend line from year to date lows, USDTRY traded back up to the 7.9999 level before finding fresh selling pressure and turning lower again. The structural and trend line support at 7.5098 remains the key pivot to break for bears, opening the way for a test of deeper support at 7.2830. While above here, though, a further move higher is still a risk.

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