USD/TRY: Lira pauses after Turkish central bank makes 9th rate cut

The USDTRY pair was relatively calm after the Turkish central bank delivered its interest rate decision.

Turkish Central Bank cuts rates

The Turkish central bank slashed interest rates for the ninth time this year. The bank, which concluded its two-day meeting today, lowered the one-week repo rate by 50 basis points to 8.25 per cent. Similarly, the bank lowered the overnight borrowing rate from the previous 7.25 per cent to 6.75 per cent. It also lowered the overnight lending rate from the previous 10.25 per cent to 9.75 per cent.

In its statement, the bank said that the Turkish economy was showing signs of strength in May after a turbulent March and April. It attributed this to its monetary policy decisions, government actions, and the falling number of infections. The statement also said that the current balance would follow a “moderate course” throughout the year due to lower commodity prices. The statement added:

“In this respect, monetary stance will be determined by considering the indicators of the underlying inflation trend to ensure the continuation of the disinflation process. The Central Bank will continue to use all available instruments in pursuit of the price stability and financial stability objectives.”

Turkish lira strength

The Turkish lira has been relatively strong in recent days. This has made the USD/TRY pair decline from a high of 7.2630 on March 7 to this week’s low of 6.7788.

This Turkish lira has been in the news for several reasons. First, the central bank announced that it was tripling its swap deal with Qatar to $15 billion from the previous $5 billion. The goal of this agreement was to improve the export-oriented economy bay making financing available as foreign reserves disappeared. That is because the bank has drawn significant foreign reserves in its bid to prop the lira. In making the amendment, the bank said:

“The core objectives of the agreement are to facilitate bilateral trade in respective local currencies and to support financial stability of the two countries.”

The USD/TRY also moved this month after the central bank barred local lenders from trading with a group of foreign banks such as UBS, BNP Paribas, and UBS. The bank reversed the strategy but the banks have stopped offering the currency to their traders.

Also, the percentage of investors trading the Turkish lira has been on a downward trend because of its volatility. According to Bloomberg, foreigners executing the Turkish lira have dropped to 30 per cent from 65 per cent in 2018. As a result, most of the lira trade is now dominated by local banks.

The Turkish central bank is the only major bank to cut interest rates this month. The Federal Reserve, European Central Bank, Bank of Japan, and Bank of Englandhave left rates unchanged this month. Still, there is talk that some banks – BOE and Fed – would implement negative rates this year.

USD/TRY technical outlook

On the daily chart, the USD/TRY has dropped from an all-time high of 7.2628 to an intraday low of 6.7517. The price is slightly below the 23.6 per cent retracement level and is along the 50-day EMA. It is higher than the 100-day EMA. Also, the RSI has dropped closer to the oversold level of 30. Therefore,  while the pair may have a minor pullback, I expect it to continue dropping as bears attempt to test the 38.2 per cent retracement at 6.5645.