A change in leadership at the Central Bank of the Republic of Turkey (CBRT) slammed the Turkish lira (USD/TRY). A little over a week later, the new governor, Şahap Kavcıoğlu, granted an interview with Bloomberg to discuss recent events and monetary policy. The CBRT published a transcript of the brief interview. Thus, I assume the attempt to allay market fears and stabilize the Turkish lira is underway. So far, the currency market appears skeptical and unconvinced.
When asked about the prospects of imminent rate cuts, Kavcıoğlu turned to the central bank playbook of data-driven policy decisions. He tried to wave off the market’s rapid pricing of a rate cut in the April policy meeting.
“I do not approve a prejudiced approach to MPC decisions in April or the following months that a rate cut will be delivered immediately. All in all, monetary policy decisions are made by the Monetary Policy Committee in view of the available information and data set regarding macroeconomic developments.”
However, Kavcıoğlu did warn that “we will also monitor the effects of the policy steps taken so far.” He declined to critique the previous decision to hike rates a whopping 200 basis points.
In the interview, Kavcıoğlu was careful not to blame inflation on high interest rates. His boss President Tayyip Erdogan maintains an unconventional theory that high rates cause inflation. Instead, the Governor pointed to structural issues in the Turkish economy beyond the reach of the CBRT. Kavcıoğlu cited volatile prices for unprocessed food and inflexible pricing for services as examples.
Overall, the interview contained no surprises. For most, it likely also delivered no new information. Accordingly, the Turkish lira continues to weaken at the time of this writing. The proof may be in the actions next month.
With a fragile economic recovery at stake, I think the rapid weakening in the Turkish lira will force the CBRT to avoid (near-term) rate cuts. If the CBRT dares to test the market’s fears, the bank will have to get extremely creative. The bank will need to accompany rate cuts with some parallel form monetary tightening. In the interview, Kavcıoğlu effectively promised not to implement “back-door tightening” with a late liquidity window or overnight lending rates. Regardless, I matched my speculation with a freshly speculative short USD/TRY position. I am giving the position enough room to hit marginal all-time highs.
I also bought a small position in iShares MSCI Turkey ETF (TUR). The ETF is lingering around its 200-day moving average (DMA). Even if this support level fails, I like the prospects of TUR holding the double bottom set last year.
Be careful out there!
Full disclosure: short USD/TRY, long TUR