On Thursday, August 20, the Central Bank of the Republic of Turkey (CBRT) will release the latest consignment of data marking its key interest rates. The one-week repo rate is our focus here. Analysts are expecting that the CBRT has ended its easing cycle by maintaining the 1-week repo rate at 8.25%.
This news release is coming on the back of record lows for the Turkish Lira, as the CBRT is finding it increasingly hard to maintain its currency interventions to stabilize the currency at a time of coronavirus-induced depletion of its foreign currency reserves. The cost of such interventions? $65 billion as at June 2020. The Lira was left to float on August 6, and it has fallen steadily against an underperforming US Dollar.
A 95% fall in international passenger traffic as a result of the coronavirus crippled the country’s tourism industry, which is its primary foreign currency earner. With depleted ability to earn foreign currency to maintain its interventions, the CBRT is in a severe bind; caught between appeasing a president who is obsessed with low rates, and preventing a further plunge in the Lira by not making it even cheaper to acquire. It would no longer make sense to reduce the cost of the Lira at the expense of the US Dollar via a reduction in the repo rate. The best the CBRT can do is to choose an option that goes in between both extremes: hold rates at the moment.
The CBRT has since suspended repo auctions done at the 8.25% rate and has chosen to tweak the numbers daily.
Trade Expectations on USDTRY
In addition to the decision on what the 1-week repo rate would be, the markets would be interested in the rate statement to get the views of the Murat Uysal-led CBRT board on the inflationary risks posed by a falling national currency. It would also be interesting to know what the bank is saying about the 1-week repo auctions.
A rate hold at 8.25%, coupled with the maintenance of the current situation on the repo market operations by the CBRT would be seen as TRY-positive, but only in the short term. This could create a trade opportunity to sell the USDTRY. However, the market fundamentals for the Lira are negative, so the drop in the USDTRY that may accompany this move may be a dip-buying opportunity. Possible support targets are 7.26356, 7.08515, 6.99821 or 6.89410.
On the flip side, a rate cut would undermine the Lira even further, sending the USDTRY to new record highs above 7.35245. We could see a pullback initially to 7.26356 just before the news, with the pair taking off if the CBRT cuts rates.