The USDTRY pair has been in a remarkable, bullish rally that has pushed the Turkish lira to the lowest level on record. The pair rose to a high of 9.8545 on Monday before it settled to the current level at 9.6160.
Turkish Central Bank
The recent rally of the USDTRY was triggered in September when the Central Bank of the Republic of Turkey (CBRT) concluded its monetary policy meeting. In that meeting, the bank decided to cut interest rates even as data showed that the inflation rate had risen sharply.
Shortly afterward, Recep Erdogan, the country’s president, decided to fire three CBRT officials. The media reported that the three officials had opposed the bank’s decision to cut interest rates.
All these events culminated in last week’s central bank meeting. In it, the bank decided to cut interest rates for the second month in a row. It cut its primary interest rate to about 16%.
All this makes the CBRT an outlier in monetary policy since many central banks are thinking about tightening the monetary policy. The Brazilian central bank has pushed rates higher several times this year. The same is true with the Russian Central Bank. At the same time, the South African Reserve Bank is expected to make a modest increase in the coming months.
In Western countries, New Zealand and Norway have already boosted interest rates, while in the United States, the Fed is expected to start tapering in the coming meeting.
The USDTRY has jumped because of how unorthodox the CBRT’s thinking is. The bank believes that higher interest rates lead to higher inflation because they make it more costly for companies to borrow.
The CBRT has also argued that higher interest rates will not lead to low inflation because of supply factors. Besides, the reason why inflation has risen is that oil and natural gas prices have jumped as OPEC has maintained low production. Also, the ongoing supply challenges cannot be solved by monetary policy.
Geopolitics and the Turkish lira
The USDTRY also soared on Monday after a spat emerged between Turkey and some Western countries. Last week, a group of western ambassadors wrote a letter demanding the release of a political prisoner who has not been charged with a crime.
In his response during the weekend, the country’s president threatened to expel these envoys. Such action would push relations between Turkey and the west to a new low. Besides, these countries would also need to expel their Turkish envoys.
In all this, Turkey would have more to lose because its economy is relatively smaller than that of Western countries like the US. The USDTRY pulled back after the Turkish government moved to calm these tensions.
Looking ahead, the next key catalysts for the USDTRY pair will be the latest US consumer confidence data scheduled for Tuesday. Corporate earnings will also have a role to play.
The daily chart shows that the USDTRY soared to an all-time high on Monday. It then pulled back modestly and is currently trading at 9.6158. It remains above the 25-day and 50-day moving averages. It is also above the ascending trendline shown in red, while the MACD is substantially above the neutral line.
Therefore, the path of the least resistance for the pair is to the upside. The following key level to watch will be the psychological level of 10.