USD / TRY continues to rise, approaching 10.40 as the lira got ahead of the expected CBRT rate cut

• USD / TRY continues to rise after it broke above 10.00 for the first time last week.
• The pair almost reached 10.40 at the beginning of the American session, but has since moderated again below 10.30.
• The CBRT is expected to cut interest rates by another 100 basis points on Wednesday despite rising inflation.

The Turkish lira it has been under intense selling pressure since the start of the European session on Tuesday. The USD/TRY, which rose above 10.00 for the first time since then, accelerated from 06:00 GMT upon the arrival of European market participants, and has since risen north of 10.20. At one point, about an hour after the US market opened, the lira appeared to take a small sudden dip, with USD / TRY rising from 10.28 to just under 10.40 in a matter of minutes. Since then, it has reversed below 10.30, where it trades up about 2.2% on the day and is the worst performing major currency in the world.

There has been no new fundamental catalyst to drive the lira higher on Tuesday. Rather, traders have cited concerns about another rate cut from the Turkish central bank (CBRT), which set policy on Wednesday, as the main reason for the lira’s continuing woes.

Even though Turkey’s annual CPI rate rose to just 20% in October, it is expected to lower interest rates by another 100 basis points to 15% on Wednesday. That would bring Turkey’s real interest rate on bank deposits (compared to the current headline CPI) to around -5.0%, one of the lowest in the world; no wonder no one wants to have liras.

The continued decline in the lira points to a continued lack of confidence in the ability of the CBRT to bring inflation back to its 5.0% target. That’s because the bank’s policymaking is tainted by the hand of Turkish President Recep Erdogan, who unconventionally believes that interest rates must be lowered to reduce inflation and has consistently fired governors who failed to cut rates. rates. Just a few weeks ago, Erdogan fired three rate setters who reportedly disapproved of CBRT’s most recent 200 basis point rate cut in September.

Erdogan, who served as the country’s prime minister from 2003 to 2014 and has served as the country’s president ever since, is not expected to lose the 2023 elections. Hence, the prospect of the CBRT succeeding in rebuilding credibility and reversing the ongoing decline of the lira is highly unlikely in the next few years. Fears continue to grow that Erdogan’s unconventional approach to economic policy, sometimes called “Erdoganomics”, will trigger a financial crisis in the country. The lira has lost 40% of its value against the dollar so far this year, and more than 20% of that drop occurred in the last three months.