USD/TRY smacks lower after surprise Turkish interest rate decision

The USD/TRY declined by more than 20 basis points after the Turkish central bank delivered a surprise interest rate decision. The pair is trading at 6.8430, which is lower than this week’s high of 6.8620.

Turkish central bank surprises the market

The USD/TRY edged lower after the Turkish central bank left the one-week repo auction rate unchanged at 8.25%. According to Bloomberg, most analysts were expecting the bank to deliver its tenth rate cut today to 8.00%. The rate was 24% less than a year ago.

In the statement, the bank said that the hold on rate cuts was necessary since the economy has started to rebound after bottoming in April. For example, they pointed to the fact that export of goods has started to normalise as other countries reopen.

According to the bank, the main risk to the economy is a continuation of the disease in the country and internationally. On inflation, the statement said:

“Keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary stance. 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.”

Prior to the rate decision, most analyst were expecting the bank to cut rate today and pause on more rates going forward. As shown below, the country has the lowest interest rates adjusted for inflation.

The bank has put more measures in place to support the economy. For example, it has been pumping money at a record pace. Statistics suggest that the money supply has increased by an annualised rate of 80%. Indeed, the country’s banks borrowed about $29.5 billion on Friday last week. Most of these funds have gone to local companies that are struggling because of the pandemic.

Analysts expect that the Turkish economy will contract by 17% in the second quarter.

Risks for Turkish economy

Economic data released this week showed that the eurozone and American economies have started to improve. This is a good thing for Turkey, which does a lot of business in these countries.

Still, the biggest risk for the economy is the rising number of coronavirus cases. In the United States, health officials reported more than 38,000 new cases yesterday. And in Germany, the number of cases has started to rise, leading to stay-at-home orders in several states.

Meanwhile, in Turkey the number of daily infections is relatively high. The ministry reported almost 1,500 new infections yesterday. That was the highest number since June 15. Therefore, as the cases rise, there is a possibility that the economy will continue to weaken.

USD/TRY technical analysis

The USD/TRY is trading at 6.8512. On the daily chart, the price is above the 50-day and 100-day exponential moving averages. The price is also above the 23.6% Fibonacci retracement level. Most importantly, while the pair has attempted to rebound, the movement has been in a tight range. This means that the price is likely to give up some of these gains because bulls are not in full control. As such, there is a possibility that the price will retest the 6.6960.