Turkey’s central bank came out fighting this week, hiking rates by 24% from 17.75%. It was above the media expectations of the market, which had been expecting a hike to 22% in the context of earlier remarks from Turkey’s president. The lira shot higher with USD/TRY sinking 40 big numbers on the announcement, to test the 6 level before inching back above 6.10.
“It represents a major and important reassertion of the central bank’s independence and show they will not be bullied by politicians, although to a large degree its hand was forced by the 18% print on August inflation,” observes Neil Wilson, an analyst with Markets.com.
The bank also seems committed to do more if necessary and this is likely be regarded by TRY traders that policy makers are serious. “It’s still a tad short of being a ‘whatever it takes’ type of commitment,” observes Wilson dryly. The move on the lira only takes it to where it was sitting at the end of August.
“This was a definite statement from policy makers, but the risk now is that the market tries to test the central bank’s resolve: the horse may already have bolted,” Wilson adds.
There was also some read across from other emerging markets currencies, with even the South African rand gaining some ground on the USD.
Will Turkey lira trade bounce back?
Some analysts are in two minds as to whether the Turkish lira trade is going to bounce back. Currency traders who were caught on the hop when the TRY rallied may be wondering whether this is the end of a consistent trend that has been rewarding them all summer long, indeed every time President Recep Tayyip Erdogan opened his mouth.
Erdogan may be waking up to the fact that excessive government intervention in the currency is only going to see the Turkish lira sold off some more, making things tougher for the Turkish economy overall.
The announcement that Turkey will be limiting foreign currency transactions, for example, is the sort of thing that will just further erode the lira’s strength and focus minds again on the Turkish lira trade.
Since the central bank raised rates the currency has been probing the 6.0 level but has not been able to break past it. The big questions is going to be whether the massive rate hike – and it was massive – will offset further rumblings from the president.
Many of the economic fundamentals – including an ongoing trade dispute and souring relations with the United States – are still in place and these are things the central bank will find harder to fix.
Traders will be sitting this out for a while to see whether the lira’s downward momentum reasserts itself in coming weeks.
