Tomorrow at 11 am UTC, the Central Bank of the Republic of Turkey (CBRT) will release its latest interest rate decision. Expectations are that the CBRT will continue its easing cycle which has been on since the incumbent Governor Murat Uysal took over from Murat Cetinkaya nearly a year ago. Since then, the repo rate has crashed from double-digit to single-digit territory. The markets expect another 50bps cut tomorrow from 8.25% to 8.00%.
The last 50bs rate cut occurred in the May meeting and was aimed at protecting the economy against the adverse effects of the coronavirus pandemic. The tourism industry, which accounts for a substantial component of Turkey’s foreign exchange revenue earnings, has virtually collapsed. Manufacturing confidence improved to 92.6, up from the last figure of 76.9. However, headwinds to the Turkish economy still exist as inflation and growth expectations remain weak. Analysts expect the bank to cut rates again, but some banks feel this may be the last after an uninterrupted year of rate cuts.
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Outlook for USDTRY
A rate cut by 50bps may not surprise the markets as this has already been priced in. If the CBRT delivers on this tomorrow, we may not see much movement on the USDTRY. Market surprise is more likely to be seen if the CBRT decides to hold rates or cuts by less/more than 50bps.
A rate cut of 25bps or no rate cut at all may have the same effect, with a rate hold producing a stronger reaction. A rate cut by more than 50bps will have the opposing effect, especially if the CBRT decides to end the rate-cutting cycle with a bang.
It is difficult to tell how the USDTRY will react to this one. However, key levels for any upside on the pair remain the 6.90051 (23.6% Fibonacci retracement from the swing low of 23 September 2019 to the swing high of 4 May 2020) as well as 6.99821 (20 April high) and 7.08515 (23 May top). These are resistance targets to watch for if the CBRT’s decision is viewed as TRY negative. A reduction in the repo rate could produce this effect. Market whipsaws could occur.
Conversely, a rate hold or cut that is less than 50% could be viewed as TRY-positive, which could spur a selloff on the USDTRY that targets 6.82231 as well as 6.66954 (38.2% Fibonacci retracement). 6.59653 could also be a likely target if the price decline is steep.
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