Fresh Troubles For The Turkish Lira

The Turkish lira is in trouble again.

Last week, USD/TRY hit an all-time high amid more dire headlines for the Turkish economy and the monetary policy of the Central Bank of the Republic of Turkey (CBRT). On April 3rd, Bloomberg reported the following issues:

7.4% GDP growth in 2017 is overheating the economy.

Turkish companies hold foreign debt equal to about 40% of GDP.

Moody’s downgraded Turkish bonds further into junk status on March 8th

Inflation ran over 10% each month from August, 2017 to March, 2018.

Net foreign direct investment dropped to $8B year-over-year as of January, 2018.

Despite the pressures, the Turkish Central Bank decided to hold all its short-term rates steady at its last monetary policy decision on March 7th. The Moody’s downgrade came the next day. The lira somehow managed to strengthen for two trading days after that. However, on March 12th, the lira weakened significantly as a breakout from the last consolidation range commenced. USD/TRY has gone nearly straight up for the last month now.

While USD/TRY trades at an all-time high, the Turkish lira has managed to experience extended periods of strength since the beginning of 2017.

A near relentless rise in USD/TRY since the financial crisis. Source: TradingView.com

I had trouble trading the Turkish lira this time around. When USD/TRY launched higher to a new all-time high, I used a quick pullback to get long. However, a steep one-day pullback on March 29th stopped me out. Like a slingshot, USD/TRY zipped from there to yet more all-time highs. Instead of chasing this latest move, I decided to fade it in anticipation of the next pullback. I also hope to collect a decent amount of carry as financial markets settle down a bit with earnings in the U.S. Still, until the CBRT takes definitive action, it makes sense to short the lira in the middle of what looks like an extended uptrend; the trend needs to be steep enough to outpace the carry.

As the Turkish Central Bank raised interest rates over 400 basis points starting in early 2017, the lira steadily strengthened. So another rate hike campaign will likely have the same effect. With the Turkish government readying more stimulus for the economy – a new investment incentive package worth 128 billion liras (~$32B) and assistance for companies seeking bank financing – the CBRT will face yet more pressure to push rates higher. Of course, the other side of the pressure will continue to come from President Recep Tayyip Erdogan who wants LOWER interest rates…!