Lira slumps as CBRT removes hiking bias

Summary:

  • CBRT keep all rates unchanged

  • Removes pledge for further tightening if needed

  • Turkish Lira losses over 1% vs USD and EUR

 

The Turkish central bank has followed the lead set be its more well established peers in abandoning a hiking bias in a move that has sent the Lira tumbling lower. This week there’s been similar messages from the BOC and RBA after the FED and ECB have already made marked large shifts to the dovish side. However, the comparisons with more developed central banks fail to take into account the economic situation in Turkey and with inflation still rampant in the emerging economy the move to a less hawkish stance could spell bad news for the Lira.  

USDTRY has surged by around 1.5% since the CBRT news broke. Price is now back up near the 6.00 handle. Source; xStation

As far as the main rates were concerned there was no change with the one-week repo rate and late liquidity window rate both held steady at 24%. The main market moving news came from the accompanying statement as the CBRT removed a key line that pledged further tightening to be delivered going forward. Selected comments from the statement are as follows:

 

According to the CBRT: “Developments in domestic demand conditions have led to some improvement in inflation indicators. Yet, higher food and import prices and the elevated course of inflation expectations point to continued risks to price stability. Accordingly, the Committee has decided to maintain the tight monetary policy stance until inflation outlook displays a significant improvement.”

 

While the tone of this may appear fairly hawkish from a neutral base it is in fact far less so than previous iterations. One final point to note is that there’s been speculation doing the round in recent weeks that the CBRT were attempting to prop up the Lira before the regional elections around a month ago. There were concerning declines seen in the reserves of the CBRT which fuelled these rumours and with the USDTRY now at a 6-month high the market is clearly seeing some weakness in the Lira.

USDTRY is now attempting to break above the 38.2-41.4% fib retracement at 5.8940-5.9572 from the highs of 7.1125 seen last August. Source: xStation  

 

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