Turkish lira launched a massive reversal yesterday in the evening following a speech from Turkish President Erdogan. Erdogan announced new policies aim at alleviating impact on an increase in USDTRY rate for Turkish savers. Domestic TRY accounts will be entitled to receive an additional interest that will be funded with public money. This is another controversial move from Erdogan. In general, it means that interest rates for domestic deposit in Turkish currency have increased. However, as Erdogan is an outspoken critic of rising interest rates, simply increasing policy rate was not an option. In turn, Turkey decided to increase rates on TRY accounts without raising the official policy rate.
Judging by the scale of move on TRY market, announcement from Erdogan caught traders off guard. While it has provided some relief for TRY holders, woes are far from over. Should Turkish currency continue to depreciate, the cost of insuring TRY accounts would skyrocket and could devastate public finances. Continued drop in lira may force Turkey to borrow more to meet costs of its new policy and it could create a vicious cycle.
A look at the USDTRY chart shows a massive slump in the exchange rate. The pair dropped 40% from yesterday's highs to today's daily lows. However, the pair managed to bounce 30% off today's daily low in the 11.00 area and is now trading slightly higher on the day. While the scale of a recent drop was enormous, monetary and fiscal outlook is not bright for the Turkish currency. Strong rebound off today's lows may signal that after an initial shock, the market will return to the uptrend and continue to move with fundamentals.
USDTRY drop was halted at the 100-session EMA and the pair has subsequently recovered daily losses and climbed above yesterday's close. Source: xStation5
