Desperate times bring out the creativity.
On Thursday, January 12, the Central Bank of the Republic of Turkey (CBRT) effectively tightened monetary policy by canceling its weekly auction used to fund banks. On top of this move, Turkey’s President, Recep Tayyip Erdogan, likened Turkey’s forex predicament to a fight against economic terrorism. Deutsche Bank emphatically refuted related claims made by a Turkish newspaper. This rhetoric apparently raised the spector of more and greater government intervention to support the lira. Combined, these events sparked a 2-day rally for the lira and its stock market to close the week.
The Turkish lira (against the U.S. dollar) ends a dramatic parabolic move with an equally dramatic 2-day fade.
Confidence returns for a moment in Turkey’s stock market and drives a 2-day 8.6% gain off the recent closing low.
In my last post on the lira drama, I warned: “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.” My post came in the immediate wake of the first emergency measures of the week which speculators clearly fought. Given the robustness of the fight, I fully acknowledged that it made sense to step aside from fading USD/TRY until sellers reversed the last breakout. At that time, the key level was 3.82. As the USD/TRY continued to rally, that key level rose. Buyers launched the next breakout from 3.88 and a subsequent rebound from 3.88 before USD/TRY finally topped out.
The path off the top was not straight down. Buyers made three big surges before giving up in the face of monetary news. Buyers tried to mount a comeback to start the 13th but ultimately failed.
The remaining fight was short-lived. Parabolic moves are built for implosion. Parabolic runs create panic buying, suck in trend-followers, and exhaust buyers. Most importantly for this particular case, parabolic moves motivate fundamental forces that are hurt by the pace of the change, a pace that can be extremely disruptive to economic activity and life. It is no accident that Turkey’s central bank is now trying to ramp up its creativity in a desperate attempt to defend the currency.
With the fade underway, the daily chart once again becomes more important than the intraday chart. Note on the daily chart above that USD/TRY sits neatly on the bottom of the uptrend channel defined by the upper-Bollinger Bands® (BBs). This is the current key level of support. If buyers fail to defend this support, the primary uptrend on USD/TRY will end. The uptrending 20-day moving average (DMA) would then become the next line of (daily) support. I think this line of support is in play because the looming prospects of more intervention going into or during the January 24th CBRT meeting present huge risks for lira holders on top of the high yield they pay for the privilege of that risk.
EUR/TRY has not yet hit the bottom of its uptrend channel. But like USD/TRY, two days of gains at the end of a parabolic move are almost all reversed.
Be careful out there!
Full disclosure: short USD/TRY, long EUR/TRY (as a small hedge)