{"id":58227,"date":"2021-11-24T01:08:57","date_gmt":"2021-11-24T09:08:57","guid":{"rendered":"https:\/\/drduru.com\/onetwentytwo\/?p=58227"},"modified":"2021-11-24T01:19:22","modified_gmt":"2021-11-24T09:19:22","slug":"how-long-can-parabolic-turkish-lira-last","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2021\/11\/24\/how-long-can-parabolic-turkish-lira-last\/","title":{"rendered":"How Long Can A Parabolic Turkish Lira Last?"},"content":{"rendered":"\n

The Turkish lira is in freefall. On November 23rd, the U.S. dollar gained about 12% against the Turkish lira. USD\/TRY is up 55% since the end of August and up 74% year-to-date. The current parabolic Turkish lira move culminates an epic battle that Turkey’s President Recep Tayyip Erdo\u011fan is waging against monetary orthodoxy. Erdo\u011fan has long claimed that fighting inflation requires lower interest rates. The President finally decided to prove his point after Naci A\u011fbal<\/a>, the former head of the Central Bank of the Republic of Turkey (CBRT), decided to fight inflation with another rate hike. On March 18th, he pushed rates from 17% to 19%. Shortly after that move, Erdo\u011fan fired A\u011fbal and installed \u015eahap Kavc\u0131o\u011flu<\/a> as the new head of the CBRT.<\/p>\n\n\n\n

A nervous currency market immediately sold the Turkish lira. As a result, Kavc\u0131o\u011flu proceeded to attempt a stabilization of the currency<\/a>. He waited 6 months before embarking on a plan of rate cuts. USD\/TRY was already at an all-time high going into the first rate cut decision in September. The rate cut left the momentum intact. The chart below maps out the parabolic path of destruction for the lira with labels for the level of interest rates at each decision point. <\/p>\n\n\n\n

\"The<\/a>
The Turkish lira is suffering a parabolic run-up in USD\/TRY<\/a>. The early signs of exhaustion are finally appearing at the time of writing.<\/em><\/strong><\/figcaption><\/figure><\/div>\n\n\n\n

The Trade<\/strong> On A Parabolic Turkish lira<\/h2>\n\n\n\n

With President Erdo\u011fan digging in his heels for a “war of economic independence”<\/a>, the implosion of the Turkish lira looks like it will endure for some time to come. However, parabolic moves are inherently unstable<\/a>. Something has to give. Whether motivated sellers of the lira finally exhaust themselves, lira shorts reach for profits, and\/or market forces actually compel the CBRT to align with traditional inflation-fighting policies, a pullback from this parabolic move lies ahead. Indeed, the chart above shows early signs of a cooling of the parabolic move. Accordingly, I tried a first small fade of the parabolic move (stop loss above 13.2).<\/p>\n\n\n\n

If a USD\/TRY pullback occurs without accompanying policy changes, then technical factors should provide sufficient guides for trading. A consolidation move and\/or test of support at the 20-day moving average (DMA) or 50DMA would set the stage for the next round of selling in the Turkish lira. For context, a parabolic Turkish lira lasted for about 6 trading days in August, 2018. USD\/TRY took almost two more years to top that all-time high.<\/p>\n\n\n\n

\"\"\/<\/a>
A parabolic Turkish lira (USD\/TRY)<\/a> in August, 2018 took three months to cool off before USD\/TRY bottomed. A new all-time high materialized in the wake of the COVID-19 pandemic.<\/em><\/strong><\/figcaption><\/figure><\/div>\n\n\n\n

Whatever the path forward, the Turkish people are trapped in the wake of this massive monetary experiment. As a result, I expect related political and\/or social challenges to feed back into volatility and even more instability for the Turkish lira.<\/p>\n\n\n\n

For reference, here are links to the last 8 interest rate decisions:<\/p>\n\n\n\n