USD/TRY: A Currency In Freefall, A Pressed Central Bank

“The Central Bank of the Republic of Turkey (CBRT) closely monitors the excessive volatility in the markets and will take necessary measures against unhealthy price formations that are inconsistent with economic fundamentals.

Banks’ borrowing limits at the Interbank Money Market established within the CBRT have been lowered to TL 22 billion to be effective as of 11 January 2017.

Moreover, foreign exchange reserve requirement ratios have been reduced by 50 basis points for all maturity brackets. With this revision, an additional liquidity of approximately USD 1.5 billion will be provided to the financial system.

Developments in markets are monitored closely and if deemed necessary, additional steps may be taken in order to maintain price stability and financial stability.” – The Central Bank of Turkey, January 10, 2017

The Central Bank of the Republic of Turkey must be getting desperate.

Five weeks ago, I noted how the CBRT’s first rate hike in three years failed to stem losses for the Turkish lira. The U.S. dollar has gained an additional 10.3% over the Turkish lira (USD/TRY) in that time. The euro (EUR/TRY) has motored ahead for a 9.9% gain. The interest rate hike clearly did nothing to stem the rush for the exits. The CBRT did the currency no favors after it decided to hold rates steady at its December 20th meeting after getting spooked by weak economic data.

The central bank is also under pressure from Turkish President Recep Tayyip Erdogan to hold down borrowing costs. The latest measures are designed to increase liquidity in the currency market (forex) and inspire some modicum of confidence in the currency.

The Turkish lira has taken a pounding in currency markets. USD/TRY trades at an all-time high and has now gone parabolic.

The Turkish lira has had a very rough 6 years even against the euro (EUR/TRY).

My strategy for trading the Turkish lira had been to fade USD/TRY in anticipation of a relief rally for the Turkish lira and a technical “cooldown” period after such an intense run-up at the time. Amazingly, USD/TRY came tumbling down very soon after I wrote that piece. However, the pullback lasted just three days and spent little time around my first target of 3.35.

I tried again to fade after the bounce was underway, but the upside resolution of the Bollinger Band (BB) squeeze (see chart above) proved too much for my hedge going long EUR/TRY. The recent three-day run up is the classic definition of a parabolic move, so I fully expect a notable pullback. If nothing else, it makes sense for longs to book substantial profits ahead of the next CBRT meeting.

For now, I am making very short-term and small trades long BOTH USD/TRY and EUR/TRY. After (if?) USD/TRY breaks below a critical technical level, then I will short USD/TRY while keeping the small long position in EUR/TRY as a partial hedge. At the time of writing, the key support sits at the base of the last breakout.

Many of the gains against the Turkish lira have happened in rapid bursts like this latest one. It does not make sense to try to fight such moves – even when they are going parabolic – until a critical support line breaks. In this case, the natural support line sits where the breakout occurred.

The CBRT next meets on January 24th. Traders will undoubtedly be watching carefully: if the CBRT fails to act forcefully, I fully expect a bout of fresh weakness for the Turkish lira.

Also see Reuters “Turkish lira tumbles to fresh lows, central bank provides support” for the latest related news.

The iShares MSCI Turkey (TUR) enjoyed a strong overall start to 2016, but has been mostly downhill since two large gap downs in May.

Be careful out there!

Full disclosure: long USD/TRY, long EUR/TRY