Turkish lira jumps on aggressive rates action

After a relatively quiet US trade, Turkey lit up the boards this morning as its central bank went above and beyond to send a message. 

There had been plenty of speculation around what action Turkey would take after we learned of a surprise 25bp rate hike by the Reserve Bank of India. The central bank of Turkey hiked the overnight lending rate to 12% (from 7.75%) and the overnight borrowing rate to 8% (from 3.5%). Additionally, the repo rate was raised to 10% (from 4.5%) and a weekly repo rate of 10% will be used in funding the banks. This was much more aggressive than what the market and even the most hawkish analysts were expecting. This move is aimed at stabilising the TRY and keep inflation under control.

Lira gains against the majors

The result was a big jump in the Turkish lira as USD/TRY dropped to 2.174, its lowest level since January 14. The moves are quite similar in all the TRY crosses, with the lira gaining ground against the EUR, JPY and GBP as well.  There is a strong chance that we’ll see some of these moves extended once European trade commences later today. As far as USD/TRY is concerned, focus will switch to the US where the Fed’s meeting is set to be completed. Near-term resistance for the pair is in the 2.16 region and we might see some stability around there or even a potential bounce should the Fed come in hawkish.

Plenty of central bank action

Central bank meetings have been the key theme this week and this is set to ramp up over the next couple of days, with the Fed, South Africa and Bank of New Zealand the key ones to watch. The Fed decision has analysts split but there is a growing camp that feels the Fed will taper by another $10 billion evenly split between mortgage-backed securities and treasuries. After that sharp miss in the non-farm payrolls data recently, it’ll be interesting to see if this makes any difference at all to the Fed’s commentary on economic assessment. 

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