Three months ago, I worried that the Central Bank of the Republic of Turkey (CBRT) was moving too late to hike interest rates. The Turkish lira (USD/TRY) is now finally working its way lower from those levels as the Turkish lira fever breaks. The path to today’s near 4-month low was fraught with wild volatility, and I am sure more wild swings lay ahead. My position short USD/TRY was small enough that I could hold through it all until the currency pair finally hit my (revised) profit target. Moreover, I held an abiding belief in an on-going weakening of the fundamentals for the U.S. dollar. When USD/TRY plunged 5.2% on November 9th, I even grew my position.
The move that changed trading dynamics in favor of the Turkish lira came in the wake of a very simple, but apparently reassuring, declaration from Governor Governor Naci Ağba:
“…The CBRT will decisively use all policy tools in pursuit of its price stability objective. The monetary policy communication will be strengthened in the framework of transparency, accountability and predictability principles.
Until the Monetary Policy Committee Meeting to be held on 19 November 2020, the current situation and expectations will be reviewed, developments will be closely monitored; and necessary policy decisions will be made with the available data and final evaluations.”
USD/TRY fell another 2.1% in the wake of that November 19th meeting. The CBRT sent its policy rate hurtling higher from 10.5% to 15%. From there, buyers stepped in and “bought the news.” USD/TRY rallied again. However, the currency pair never quite broke free of overhead resistance from its 50-day moving average (DMA).
Fast forward to the last meeting on December 24th. The CBRT increased its policy interest rate from 15%-17%. In its statement, the CBRT stood firmly on a strong anti-inflation stance (emphasis mine):
“Domestic demand conditions, cumulative cost effects, in particular the exchange rate effects, increasing international food and other commodity prices and deterioration in inflation expectations continue to affect the pricing behavior and inflation outlook adversely. Accordingly, the MPC, taking into account the end-2021 forecast target, has decided to implement a strong monetary tightening, in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process as soon as possible.
In the forthcoming period, tightness of monetary policy stance will be decisively sustained until strong indicators point to a permanent fall in inflation in line with the targets and to price stability.”
Turkey took a significant and positive turn in its policy regime and economic prospects. Hopefully, the higher rates do not choke off economic activity before the CBRT tames inflation.
Turkish stocks have more consistently benefited from the new central bank regime. For example, iShares Inc MSCI Turkey ETF (TUR) went parabolic this week including today’s 3.4% gain. Unlike my trade with the Turkish lira, I was not patient enough to hold TUR through this entire move.
Be careful out there!
Full disclosure: no positions