Lira rallies after CBRT hike while ECB and BOE stand pat

Summary:

• Turkish Lira soars after CBRT hike more than expected

• ECB unchanged but upbeat Draghi sees EUR edge higher

• GBP also makes small gains after BoE stand pat

• US CPI misses forecasts; USD falls lower

• Crypto bulls return; Ethereum rallies 12%

The main event of the day saw the Turkish central bank (CBRT) announce a more aggressive than expected tightening of their monetary policy which provided a much needed boost to the beleaguered Lira. The USDTRY had earlier spiked higher after president Erdogan said “we must lower rates” to a group of small businesses, but the central bank ignored the pressure form above and followed the conventional path in hiking rates in an attempt to curb inflation. The one-week repo rate was hiked to 24% from 17.75% well  above the median estimate of 21%. It quickly pushed the TRY higher from a 2% loss to almost a 4% gain.

While the latest CBRT decision may have stolen the limelight today from the ECB, there were still several noteworthy developments from the bank as it kept rates unchanged and President Draghi delivered a press conference that could be characterised as quite upbeat. The EURUSD rose strongly during the speech, but a look across other pairs reveals that this was more due to the USD weakness seen following the US CPI miss, than anything Euro positive.

The third central bank decision around lunchtime saw the Bank of England decide to keep main interest rate unchanged at 0.75% after delivering a rate hike in August. All 9 members of the Monetary Policy Committee voted for no change. Other monetary policy settings like the asset purchase target were also left intact. The UK central bankers raised their economic growth forecast for the third quarter of the year from 0.4% to 0.5% while admitting that growth was stronger than expected recently.

Yesterday’s PPI release coming in below forecasts served as a good predictor for today’s more widely viewed CPI number which also missed to the downside. In year-on-year terms the headline CPI for August came in at 2.7% vs a consensus forecast of 2.8%. This marks a larger than expected drop on the previous month which showed a print of 2.9% and today’s number is in fact the lowest in 4 months. The initial reaction in the markets has been a clear drop in the US dollar while both US indices and the TNOTE have rallied higher, with the latter indicating a drop in yield on 10-year government debt. These moves have pared a little by the European close but the USD remains lower on the day.

It’s been a good day for cryptocurrency bulls with some large gains seen in the space. Ethereum, Dash and Litecoin are all higher by more than 12% while Bitcoin and Ripple are also in the green. The most positive news which could be contributing to these gains seems to come from Morgan Stanley with the bank taking steps to allow its clients to trade these markets. MS are reportedly preparing to offer bitcoin swap trading for clients, and this news comes at a good time as it is not long after rival Goldman Sachs shelved plans for a crypto trading desk and may be seen as a vote of confidence in crypto from the large institutions in finance.