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Turkish Central Bank Raises Rates, Lira Weakens Shortly After

by on January 30, 2014 1:54 am GMT
 

The Turkish bank raised a series on primary rates in a desperate attempt to stop the rapid deterioration of the lira, which has been troublesome for many business owners and the re-ignition of economic growth. The lira immediately firmed up once announcement of the rate increases but it has since weakened as the FOMC decided to move forward with the reduction of quantitative easing in the United States, which has been a sore spot for riskier emerging market investments.

The one-week repurchased rate jump 550 bps from 4.5 percent to 10 percent, and given the four or five “key” rates, this should be viewed as the benchmark rate.The central bank is aiming to regain some credibility and look to simplify its interest rate structure. For instance, the overnight lending rate moved from 7.75 percent to 12 percent, the overnight borrowing rate moved from 3.5 percent to eight percent. Monetary policy is very political in Turkey, and rime Minister Recep Tayyip Erdogan has continued to voice his opinions against the rate hikes and conducted a public blasting of several world news organizations for the increased trouble in Turkey.

However, the central bank has its work cut out for them with Erdogan increasing the political flame. It also has to develop a more orthodox operational framework.

The lira could see further declines as the dollar has been gaining strength due to the Federal Reserve’s want to get out of the massive pandora’s box known as quantitative easing. A reduction of this liquidity will lessen the want for risky emerging market investments. The interest hikes can also be seen as making Turkey more attractive, in investment terms, because investors will be compensated for the risk with extra yield. The lira is likely to continue downward.

Support for the USDTRY came at 2.1609 after the initial increase in the lira, but the dollar has paired much of the lost ground seen. USDTRY also looked to hit a strong resistance level at 2.3000. Currently trading at 2.2620, look for the USDTRY to retest 2.300 with a series of bullish exponential moving average crossovers happening in the short-term.

4H Chart of USDTRY

4H Chart of USDTRY

The weekly chart shows the sharp reversal at the currency support of 2.1609. The RSI moved out of overbought territory, but the trend is still upwards. Also, note that the RSI has stayed well above 50 since the beginning of 2013 and is comfortable in the higher range of slightly- to outright overbought. A strengthening US dollar will continue the trend until the central bank can devise a more appropriate strategy for economy growth.

WK Chart of USDTRY

WK Chart of USDTRY