The deluge of central bank decisions has begun, with the BOE and CBRT in Turkey both releasing their decisions. Looking at Turkey first, the CBRT has delivered a mega rate hike to 24% from 17.75%; the market had expected 21%. This has triggered an immediate 8% jump in the TRY vs. the USD as the market was taken off guard by a hawkish CBRT. This move is a powerful driver of TRY in the short term for a few reasons: firstly, it is a powerful signal to the financial markets that the Turkish central bank is independent, as the decision comes mere hours after President Erdogan launched a tirade against higher interest rates. Secondly, after months of stasis at the CBRT, the bank is finally taking the bull by the horns and hiking rates in an attempt to strengthen the currency after a near 40% decline vs. the USD in recent months.
Will the CBRT stop here?
The economic data out of Turkey in recent months has not made for comfortable reading, however the central bank has decided that higher rates are justified, even with a slowing economy and potential for a recession, and that halting the currency ‘s slide is of primary importance to the Turkish economy at this juncture. Due to the high level of foreign-denominated debt in Turkey, this is a sensible plan. However, we need to see investors reactions over the next few days and weeks to see if this is enough to stop the capital slide out of Turkey and if the lira can sustain a recovery over the long term.
Will the uplift for TRY be temporary?
At the time of writing, there has been some selling interest at 6.0 in USD/TRY, suggesting that the uplift for the TRY could be temporary. This does remind me of the Argentinian peso, the Argentine central bank had to lift interest rates to 60%, yet this still hasn’t boosted the currency to any major extent. Could Turkey go the same way? Will the market demand that the CBRT continues on its rate-hiking path, and continues to defy Erdogan? We doubt that the CBRT will have the teeth to continue to raise rates, thus the surge in the TRY may not be sustainable over the long term. We will be watching the TRY closely today to see where it closes tonight, at which point we will be able to take a longer-term view.
BOE: Carney and co. temper GBP rally with Brexit fears
Regarding the BOE, the fairly neutral statement from the BOE has not benefited the pound too much. The statement had something for hawks and doves. The statement mentioned that growth was stronger than expected and that inflation pressures were building, however at the same time it mentioned that the BOE remains on guard for any economic fall out from the Brexit negotiations with the EU, saying that “Since the Committee’s previous meeting, there have been indications, most prominently in financial markets, of greater uncertainty about future developments in the withdrawal process.”
This is one reason why the FX market’s reaction to this decision has been so muted – the BOE thinks that things have got worse from an economic perspective based on the political bickering at Westminster. The message from today’s BOE decision: buck up MPs and get a decent trade deal with the EU. This message is, unsurprisingly, not that pound supportive, which means that GBP bulls will need to rely on more positive domestic economic data flow, or a weak CPI reading from the US this afternoon to see further GBP gains.