The USDTRY pair spiked as investors reacted to the interest rates decision by the Turkish central bank and the surging numbers of coronavirus cases.
Turkish Central Bank Cuts Rates Again
The Turkish central bank slashed interest rates again as it tries to deal with the current pandemic. The bank slashed the one-week repo auction rate from 9.75% to 9.75%. This was a bigger rate cut than the 9.25% that investors were expecting.
The bank also slashed the overnight borrowing costs from the previous 8.25% to 7.25%. Most importantly, the bank slashed the overnight lending rate from 11.25% to 10.25%. In the monetary policy statement, the bank attributed these actions to the need for the need to support the Turkish economy during the current crisis. The bank said:
Developments in inflation expectations, domestic demand conditions and producer prices have contributed to a mild trend in core inflation indicators. Despite the recent depreciation in the Turkish lira due to global developments, continued sharp decline in international commodity prices, especially crude oil and metal prices, affects inflation outlook favorably.
The Turkish lira has been relatively active since the current crisis started. In March, the bank slashed interest rates by 100 basis points from 10.75% to 9.75%. It has also provided banks with additional liquidity to prevent banks from failing. The bank has also strengthened the monetary transmission mechanism boosting liquidity and supported the cash flow of exporting firms through rediscount credits.
Still, the Turkish lira has continued to decline. The currency has dropped by almost 18% this year and is trading near its all time high against the dollar.
Coronavirus cases rise in Turkey
The USDYTRY pair also rose because of the surging coronavirus cases in Turkey. According to Worldometer, the total number of coronavirus cases has reached more than 95k while deaths have increased to more than 2259. Worse, the number of new cases has been rising. Yesterday, the country reported more than 4,600 new cases, which was double the number of cases in the first week of the month.
The crisis has also affected the Turkish economy, which is expected to go through a recession this year. In a report released early this month by Fitch, the company said that it expects the economy to grow by 0.8% this year. Previously, Fitch had guided for a 3.9% growth.
On the weekly chart, the USDTRY has been rising, and is approaching its August 2018 high of 7.1725. The pair also appears to be forming a cup and handle pattern. At the same time, the current price of 7.0200 is above the 50-period and 100-period moving averages.
Therefore, I expect the pair to continue the upward trend. I also expect it to test the August 2018 high of 7.1725, where it will find significant resistance. In line with the cup and handle pattern, I expect the pair to move to the 50-period EMA after it hits the 2018 high.