Forex Critical: A Roiling Market Finally Shakes The Turkish Lira

In 2018, the Turkish lira experienced significant selling pressure. At one point in August, the currency went parabolic. USD/TRY gained as much as 34% in just three trading days from August 8th to the 12th. On August 13, 2018, the Central Bank of the Republic of Turkey (CBRT) responded with a laundry list of measures to defend the lira, including a notable reduction in reserve requirements. The lira immediately stopped its bleeding. However, in less than a week, sellers started pressuring the lira all over again. With USD/TRY climbing rapidly again, the CBRT took the unusual step of announcing it would take significant actions to defend the currency ahead of its upcoming policy meeting:

“Recent developments regarding the inflation outlook indicate significant risks to price stability.
The Central Bank will take the necessary actions to support price stability.
Accordingly, in line with the previous communication, monetary stance will be adjusted at the September Monetary Policy Committee Meeting in view of the latest developments.
The Central Bank will continue to use all available instruments in pursuit of the price stability objective.”

This “threat” was enough to put an immediate end to the pressure on the lira. On September 13, the CBRT iced the deal with a massive increase in its policy rate (one week repo auction rate) from 17.75% to 24%. After initially dropping sharply, USD/TRY retraced all its losses and then some in four trading days. Gravity took over once more, and USD/TRY has declined ever since.

These actions were so dramatic that the October and December monetary policy decisions were met with relative yawns as the Turkish lira barely responded. Still, the ensuing two and a half months of lira strength (USD/TRY weakness) brought much needed forex relief for Turkey. The calm was so complete that the lira did not even respond to deepening weaknesses in global financial markets in October and November. Even the historic sell-off in U.S. stocks in December was only good for a 3-day rally in USD/TRY at the beginning of December. This week’s tumultuous start however finally stirred up fresh trouble for the lira in a move that looks like USD/TRY has finally reached a bottom.

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Disclosure: long USD/TRY, short EUR/TRY, net long the Australian dollar and Japanese yen.

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