USD/TRY approaches record high as Turkish Central Bank cuts key interest rate

on Apr 22, 2020
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  • TCB slashed its key interest rate by 100 basis points, from 9.75% to 8.75%
  • Surveyed analysts expected a cut of 50 basis points
  • Buyers are now testing the $7.00 handle, near the record high of $7.08

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Turkish Central Bank (TCB) slashed its key interest rate by 100 basis points, from 9.75% to 8.75%. USD/TRY reacted by moving slightly higher to test the $7.00 handle, near the record high of $7.08.

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Fundamental analysis: Central banks make an aggressive move

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In a surprising move, the TCB said it had decided to cut the key interest rate by 100 basis points to 8.75%. Analysts, surveyed by Reuters, expected a 0.50% cut. 

The bank also said it has invested nearly $3 billion in purchases of government debt in the past four weeks. It slashed interest rates to support the business activity, which weakened since the middle of last month.

“Despite the recent depreciation in the Turkish lira due to global developments, (a) continued sharp decline in international commodity prices, especially crude oil and metal prices, affects (the) inflation outlook favorably,” the bank said in a statement. 

“Risks on the year-end inflation projection are on the downside.”

The interest rate now stands at 8.75%, after multiple cuts from 24%, where it stood last June. Slashing interest rates will help banks support businesses, but will also further damage the Turkish lira, which is already under heightened pressure from the USD and EUR. 

“As developments regarding the spread of the coronavirus substantially weaken global growth outlook, central banks in advanced and emerging economies continue to take expansionary measures. The pandemic disease is closely monitored for its evolving global impact on capital flows, financial conditions, international trade and commodity prices,” it is said in the statement. 

TCB predicts that the inflation would fall to 8.2% by the end of the year, after being registered at 11.86% in March.

Technical analysis: Buyers attack the $7.00 handle

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Since the creation of the all-time high in 2018, the sellers have managed to push the price nearly 30% lower and allow some breathing room for the businesses to recover. This is after the Turksih lira fell more than a 100% in just 12 months, traveling from $3.5 to $7.08.

USD/TRY weekly chart (TradingView)

However, the buyers remained in control and have initiated a new push higher in the meantime. The price action is now testing the $7.00 handle as the buyers target a new record high above $7.08. Any deeper pullback is likely to end at $6.25, where a strong level of support is located. 

Summary

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USD/TRY moved slightly higher after the Turkish Central Bank made a surprising cut to its main interest rate by 100 basis points, instead of the 50 basis points expected by the surveyed analysts. 

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