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by Charalambos Pissouros

Is Turkish Lira's Free Fall Over? or Not?

On Friday, the financial world had its gaze locked on the Turkish lira’s tumble. The lira’s collapse accelerated after Turkish and US officials failed to find common ground on Thursday with regards to a diplomatic rift over the imprisonment of an American pastor in Turkey, while concerns about President Erdogan’s influence over monetary policy continued to weigh on the currency. Just for the record, last month, US President Trump threatened to impose “large sanctions” on Turkey if it refuses to free the American pastor.

In a speech on Friday, President Erdogan urged Turks to convert their FX and gold holdings into liras, perhaps disappointing market participants who expected him to eventually compromise and agree that the Turkish central bank should proceed with increasing interest rates. Soon after his speech, US President Donald Trump announced that he decided to double the tariffs on steel and aluminum for Turkey, something that added to lira’s already massive losses.

The whole matter had a spillover effect around the globe, hitting the broader market sentiment, with investors abandoning riskier assets and seeking shelter into safe havens. The euro got hit hard as well after the Financial Times reported that supervisors at the ECB are worried over the exposure of some of Europe’s biggest banks to Turkey.

The lira pared a small fraction of its losses later in the day on reports that Jay Sekulow, one of President’s Trump’s attorneys said they were close to reaching a resolution over the pastor’s imprisonment matter. However, just after Monday’s opening, the currency tumbled again to hit a fresh all-time low against its US counterpart. It gained again slightly a few hours thereafter following the Turkish central bank’s decision to cut the lira required reserve ration by 250bps and lower reserve ratios for non-core FX liabilities by 400bps for maturities up to 3 years. With these changes, around TRY 10bn, USD 6 bn and USD 3bn equivalent of gold liquidity will be injected to the financial system.

Having said all these though, with the S&P’s sovereign rating over Turkey due to be updated this Friday, further downgrading could give another push down to the Turkish currency. We believe that a clear resolution over the pastor’s case, alongside a massive rate hike by the Turkish central bank are needed for the lira to reverse and recover some more of the huge losses it posted lately.

CBRT Turkish Central Bank Interest Rate

USD/TRY Technical Outlook

Massive devaluation of the Turkish Lira was seen last week, especially on Friday, when the Turkish currency lost about 26% of its value against the US dollar. During the day, there was a moment when the currency was down around 34% against USD, with USD/TRY reaching a high of 6.866. Today, just after the opening, the pair surged more to hit a new all-time high, at around 7.109, before pulling back after the measures of the Turkish central bank.

Despite the latest setback, the technical picture still points to a steep vertical uptrend. Thus, we would treat the current pullback as a correction and we will aim for higher levels again. If the bulls take charge again from current levels and manage to drive the battle back above the 6.866 barrier, this could open the path for another test near the all-time high of 7.109. A break of that level could set the stage for new all-time highs.

Even if USD/TRY drops below its Friday’s closing price, at around 6.3800, a further decline would not necessarily mean a trend reversal. The pair could reach its tentative upside support line, taken from the low of the 1st of August, which could act as a good bouncing ground.

For us to start aiming for lower levels in the near term, we would need to see a decisive break and a close below that upside line and also the 5.545 area, near Friday’s opening rate. A drop below that could invite some bears to jump into the action and drive the pair lower to the 5.279 zone, approximately where USD/TRY started off the day on Thursday. 

USDTRY Daily Chart Technical Analysis

 

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