Forex Critical – Turkish Lira Gains Fresh Strength on Central Bank and Political Moves

On May 10th, the Turkish lira finally sprung back to life after USD/TRY hit a 7-month high. The move came right on the heels of another move by the Central Bank of the Republic of Turkey (CBRT) to adjust its reserve requirements in a way to support the currency:

“Considering the latest developments in financial markets, reserve requirement ratios have been changed as follows to support the financial stability.
The upper limit for the FX maintenance facility within the reserve options mechanism has been lowered from 40 percent to 30 percent.
Reserve requirement ratios for FX liabilities have been increased by 100 basis points for all maturity brackets.
With the revision in FX maintenance facility within the reserve options mechanism, 2.8 billion US dollars of FX liquidity will be provided to the market, whereas 7,2 billion TL will be withdrawn. As a result of the increase in FX reserve requirement ratios, 3 billion USD of FX liquidity will be withdrawn from the market.”

The CBRT essentially moved again to make it more difficult and more expensive to short the lira. I wanted to write about the new currency developments but, strangely enough, the CBRT website was down that following weekend. I decided to wait.

I picked up the “pen” now because the lira is on the move again. To start the week, the CBRT moved again to support the currency:

“Reserve requirement ratios for FX deposits/participation funds have been increased by 200 basis points for all maturity brackets to support financial stability.

As a result of this, 4,2 billion USD of FX liquidity will be withdrawn from the market.”

(Bloomberg provided a handy timeline starting in 2018 listing out the main attempts of Turkey’s central bank to support the Turkish lira).

The lira surged today on the heels of news that U.S. President Trump and Turkey’s President Tayyip Erdogan may be talking nice. The two leaders are set to talk in late June which offers up hope to financial markets that U.S. sanctions on Turkey will not happen. The lira strength was enough to slam USD/TRY right into its support at the 50-day moving average (DMA). This moving average held as firm support the last time the lira rapidly strengthened.

USD/TRY dropped to 50DMA support which has held firm as support or a pivot all year.
USD/TRY dropped to 50DMA support which has held firm as support or a pivot all year.
Source: TradingView

The run-up in USD/TRY peaked in the wake of political turmoil. At that time I wrote about this churn in the context of the “organized chaos” of trading in the lira. I also wrote about a change in my trading strategy. I took profits on my long USD/TRY position and kept my small hedge in short EUR/TRY. My flip proved timely, and I have since started reaccumulating a long USD/TRY position. I am looking to add a little more to that long USD/TRY position in case the 50DMA holds again.

For now, I am still net long the lira, and I hope to remain so for weeks to come as I want to continue collecting carry. If 50DMA support breaks, I will likely aggressive add to my short EUR/TRY with a tight stop above the 50DMA. I plan to take profits on the position if EUR/TRY challenges the lows that held as support since December. I assume the odds are slightly better than 50% such a challenge happening as long as Turkey can avoid freshly negative headlines going into the meeting between Trump and Erdogan.

Be careful there!

Full disclosure: net long the Turkish lira

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.