USD/TRY: Is the Turkish lira a buy ahead of CBRT interest rate decision?

USD/TRY: Is the Turkish lira a buy ahead of CBRT interest rate decision?
Written by:
Crispus Nyaga
22nd October, 04:20
  • The USD/TRY has risen substantially this year because of pressures of the Turksish lira.
  • The Turkish central bank (CBRT) will deliver its rate decision today.
  • Analysts expect that the bank will hike rates for the second consecutive month.

The USD/TRY price is little changed today as traders wait for the Turkish interest rate decision that will come out later today. The pair is trading at 7.8155, which is substantially lower than the all-time high of 7.9575.

USD/TRY
Rurkish lira has been under pressure

Turkish central bank decision

The Turkish lira has been one of the worst-performing currencies in the world. Year-to-date, it has dropped by more than 32.5% against the US dollar and by 40% against the euro. It has also declined against its fellow emerging market currencies like the South African rand and Mexican peso.

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The weakness of the lira is mostly because of the actions by the central bank, which has slashed interest rates nine times. The bank has also implemented several measures to curb shorting the currency. Most importantly, the lira has fallen because of the damaging impacts of the pandemic. The disease has infected more than 353k people in Turkey and killed close to 10,000.

The Turkish central bank will deliver its rate decision at 11:00 GMT. Analysts polled by Reuters expect that the bank will raise interest rates for the second month in a row. They see a 1.75% hike to 12.0%. They also see the bank raising its overnight borrowing and lending rates to 10% and 13%, respectively.

Recent economic data is supportive of the rate increase. For example, retail sales rose by 5.8% in August, the third straight months of gains. Similarly, industrial production increased by 10.4% in August after rising by 4.5% in the previous month. Most importantly, inflation is close to 12%, which makes it ideal for rate increases. And, foreign investors have returned to the market, as evidenced by the recent action in the bond market. This month, JP Morgan facilitated bond sales worth $2.5 billion.

Meanwhile, traders have started being bullish on the lira again. In a recent note, Thomas Clarke, a senior investment analyst at William Blair called the currency “significantly undervalued.” He said that he hads built a long position on the currency. He told Bloomberg:

“It has been undermined by fears that the central bank under political influence will not adequately tighten monetary policy to contain high inflation.”

USD/TRY technical outlook

USD/TRT
USD/TRY technical chart

The four-hour chart shows that the USD/TRY pair has dropped from a high of 7.9574 to today’s low of 7.8153. The price has moved below the 15-day and 25-day Hull moving averages. It has also moved below the ascending channel that is shown in red while the Relative Strength Index (RSI) has moved to the oversold level. It is along the second support of the standard pivot points. Therefore, I suspect that the pair will continue falling as bears aim for moves below 7.800.

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