USD/TRY: the Turkish central bank vows to fight inflation

The news that the Turkish central bank will likely raise rates after August's inflation reading came at 17,9% was able to stop the fall in the lira only briefly. As the chart on the left shows, USD/TRY attempted to break below the upwards trend-line but failed. This seems to confirm the warning of many currency strategists: at this point even a rate hike may not be enough to stop the fall in the lira.

The remarks by the central bank were unexpected because the bank is set to meet in 10 days. This shows the urgency of the present situation. According to some analysts, the remarks may serve to increase the pressure on the currency. If the rate hike is small the markets may interpret this as a sign that the central bank is weak and cannot protect the currency. This will likely cause USD/TRY to shoot up to 7,1.

Currently, any positions in the lira are too risky, especially given the curbs on shorting the lira. We see two potential signals for a trade:

1. Either weakness or hawkishness from the central bank going forward
2. A breakout above the orange downwards trendline, or a breakout above or below the purple channel will be a powerful signal for either long or short positions.

Source: Bloomberg Finance L.P.

Image: Used with permission of Bloomberg Finance L.P.