Turkish Lira Charts Warn of "Extreme Caution"

- USD/TRY setback may be imminent, charts warn
- "Extreme caution" warranted says Commerzbank
- Market seen as positioned for CBRT rate cut in Oct.
- Rate decision & outlook key for USD/TRY, GBP/TRY

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Spot Market Rate at Publication:
GBP/TRY: 12.77

The Lira has edged higher from new all-time lows after USD/TRY stalled in the face of technical resistance on the charts this Monday, although analysis from Commerzbank suggests that a further corrective rebound could be in store for the Turkish currency over the coming days.

Turkey’s Lira staged a rebound from Monday’s record low when USD/TRY beat a retreat from 9.3722 over the course of Tuesday and Wednesday, which curbed rallies in other Lira-facing exchange rates including GBP/TRY in the process ahead of the Thursday session.

USD/TRY’s corrective fall follows a 7% rally for the month to October 21 and comes ahead of October’s interest rate decision from the Central Bank of the Republic of Turkey (CBRT) this Thursday, which will be a key determinant of the outlook for the Lira over the coming days and weeks.

“We note the 13 count on the daily and weekly chart and we also note the TD resistance at 9.5016. Extreme caution is now warranted,” say Karen Jones and Axel Rudolph, both technical analysts at Commerzbank, in a Tuesday review of USD/TRY’s charts.

“We would tighten stops and lighten the long position,” they also said.

USD/TRY’s setback had been flagged as likely beforehand by technical analysts at Commerzbank who suggested that an even deeper retracement is likely, although they’ve also cautioned that the overall uptrend would remain intact for as long as the market holds above 8.8037.

Above: Commerzbank slide showing USD/TRY with technical indicators and analysis.

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A weaker Dollar and returning bid for the heavily sold Lira each weighed on USD/TRY ahead of October’s CBRT decision, although investors’ collective response to the next step in Turkish monetary policy will be a dominant influence on the trajectory and outlook of the currency from Thursday.

“The dismissal of three MPC members last week, as mentioned above, had led analysts and investors to expect another policy rate cut,” says Nimrod Mevorach, a strategist at Credit Suisse, in a Wednesday research note.

“We judge USDTRY downside to be limited to the 9.05 area even if the central bank surprises investors by staying on hold tomorrow. We raise our short-term USDTRY target to 9.60 as our previous range view (8.60-9.20) now looks too optimistic,” Mevorach also said.

USD/TRY spiked while the Lira sustained heavy losses late last week and on Monday after President Recep Tayip Erdogan dismissed three members of the CBRT’s interest rate setting Monetary Policy Committee, leading the market to bet that a large interest rate cut would be announced on Thursday.

Above: USD/TRY shown at daily intervals with major moving-averages and Fibonacci retracements of September rally indicating possible areas of technical support. Shown alongside GBP/TRY.

“We expect the CBRT to push ahead with more easing and cut the benchmark one-week repo rate by 100bp to 17% on Thursday,” says Cristian Maggio, head of emerging market portfolio strategy at TD Securities, in a note to clients ahead of the CBRT decision.

“The market and the consensus also expect easing, which should leave USDTRY on a moderate upside trend (as easing is already in the price, but it will also clearly depend on the magnitude of the move), while a decision to hold would give the lira some reprieve,” Maggio also said.

The Lira had already fallen heavily before last week, leading USD/TRY to set new highs repeatedly while lifting GBP/TRY to 12.15 by the end of September after the CBRT announced a surprise cut to its interest rate from 19% to 18%.

Analysts, economists and the market had expected the cash rate to be cut eventually, albeit not until close to year-end, but the sooner-than-expected move in September led the market to anticipate further cuts that come larger and earlier than previously expected.

Above: USD/TRY shown at weekly intervals with major moving-averages and GBP/TRY.

“When the central bank cut its policy rate by 100bps at its previous meeting (23 September), it was counting on its projection of a fall in inflation during the remainder of the year. But now, the expected FX pass-through from the latest selloff in the lira undermines this argument,” Credit Suisse’s Merovach says.

The September reduction in borrowing costs was particularly controversial for coming at a time when Turkish inflation was rising sharply, much like in many other countries around the world, and has reinforced the market’s perception of a bank that is subject to a high level of political influence.

Since then the Lira has fallen heavily while analysts at many firms have lifted forecasts for USD/TRY and other Lira exchange rates so the risk is of further losses for the Turkish currency sooner or later.

“It seems that bringing inflation down to the 5% target is not a policy priority for the central bank, so policymakers are likely to have a degree of tolerance for further TRY weakness, if it materialises, despite its inflationary effects. They could also look to counter some of the volatility with FX Intervention,” says Melis Metiner, a CEEMEA economist at HSBC.

While the Lira’s losses since September have been large, they’re even more significant for 2021 overall given the -15% sell-off in March, which followed Ankara’s dismissal of Nagi Agbal, CBRT Governor Şahap Kavcıoğlu’s predecessor, who’d raised the cash rate from 17% to 19% just days previously.