Although Turkish Lira Looks Intimidating Before TCB Policy Meeting, Further Drop Past 15.50 to USD Looks Unlikely

We wrote repeatedly about the recent demise of the Turkish lira, caused by Turkey’s Central Bank’s non-conventional monetary policy. Since there was no turnaround in that policy, ever since the dire situation is only getting worse. Today Turkey’s lira tumbled past 14 to the dollar for the first time, leaving the country’s central bank in front of a hard dilemma on whether to keep cutting interest rates this week despite rising inflation. The decline was exacerbated after S&P Global Ratings slashed the outlook on the nation’s sovereign credit rating to negative last Friday, citing risks from the “extreme currency volatility.”

As of today, The lira traded 4.1% lower at 14.24 by 13:15 p.m. CET. The yield on Turkey’s 10-year government bonds soared by 31 basis points to a three-year high at 21.69%. The lira has slumped 48% against the dollar this year and is the worst-performing currency in emerging markets. The central bank announced its fourth market intervention in two weeks, selling dollars from its reserves to the open market.

Although, as we mentioned, the initial trigger for the slump was the sovereign debt outlook downgrade, the risk of further rate cuts later this week makes the whole picture even grimmer as Turkey’s Treasury & Finance Minister Nureddin Nebati told Haberturk newspaper on Sunday that the government remains firm not to raise rates.

The central bank, which has slashed the one-week repo rate by 400 basis points since September to fulfill demands from President Recep Tayyip Erdogan for lower borrowing costs to boost growth, is expected to cut it by an additional 100 basis points to 14% this week during the scheduled Turkish Central Bank’s BoD meeting. The central bank has already cut its policy rate by 400 basis points to 15% since September.

Technically speaking, Turkish lira is in freefall against the USD, but the currencies pair chart shows it has been plateauing lately, so at this point, even though a majority of polled analysts expect no material change to TCB’s stance in terms of its monetary policy direction, the effect of bearish bid saturation may be limiting further lira’s drop by 15–15.5 to USD.