TRY Analysis and Talking Points
- Turkish Central Bank Set to Raise Interest Rates
- Size of Hike to Dictate Direction of Lira
The Turkish Central Bank (CBRT) is expected to raise interest rates today in order to provide a boost to the Turkish Lira, which is trading with losses of 67% this year. Price action in the Turkish Lira has generally been viewed as a proxy for sentiment surrounding emerging market currencies. As such, actions taken by the CBRT today could provide a notable knock on effect for the rest of the EM complex.
Heading into the meeting, expectations of the size of the rate hike range from 225bps-725bps, however, the general consensus is for a 425bps hike in the one-week repo rate.
- One-Week Repo Rate Exp. 22% (Prev. 17.75%)
- Overnight Lending Rate (Prev. 19.25%)
- Overnight Borrowing Rate (Prev. 16.25%)
- Late Liquidity Window (Prev. 20.75%)
Rising Inflation Supports Rate Hike
Given the fall in the Turkish Lira coupled with the rise in oil prices, inflation is now tracking at the highest level since 2003, with last month’s reading printing at 17.9%, which in turn supports the case for action to be taken at today’s meeting. As a result of last month’s inflation print, the central bank has subsequently signalled that they would adjust monetary policy to cool inflation. However, the direction that the Turkish Lira takes will depend on the size of the hike. Although, if the Turkish Central Bank refrain from raising rates as was the case in July, USDTRY may well see a fresh record high.
Turkish Lira Implied Volatility Elevated
Today’s decision is expected to reignite volatility in the Turkish Lira with option markets pricing in a 15 big figure move in the spot price.
USDTRY PRICE CHART: Daily Time Frame (January-September 2018)
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--- Written by Justin McQueen, Market Analyst
To contact Justin, email him at Justin.mcqueen@ig.com
Follow Justin on Twitter @JMcQueenFX
