For the third week, USDTRY does not seem to rise or fall. The pair is at the same level, and only the Bank of Turkey is able to influence the situation. Let’s discuss it and make a trading plan.
Monthly fundamental lira forecast
Big chances are never small stakes! Under this slogan, investors usually park their money in the assets of emerging countries. If a dictator rules such states, investors will be completely on edge. It is not known what the president will come up with and how it will affect the economy and financial markets. Recep Erdogan and the central bank he controls brought the country into a crisis. The theory about the benefits of low-interest rates to beat high inflation does not work, which is reflected in the USDTRY price.
Since the beginning of the year, the Turkish lira has fallen by 40% against the US dollar amid the largest divergence in monetary policy in the world. While the Fed continues to raise rates to fight the highest prices in decades, the Bank of Turkey is cutting rates, although inflation is ten times higher than the US one. The real yield of US Treasury bonds is gradually increasing, while the Turkish one is declining. These factors, plus the flow of capital to North America, helps the USDTRY.
The dynamics of US inflation and the Fed rate
Source: Bloomberg.
According to Bloomberg experts, on October 20, the Bank of Turkey will lower the key rate for the third time in a row. This time by 100 bps from 12% to 11%. This was stated by Minister of Finance Nureddin Nabati, saying that this is what the president wants. Recep Erdogan demands that the central bank bring borrowing costs to single digits by the end of the year. According to him, this is done to stimulate economic growth, ensuring victory in the presidential elections in the summer of 2023.
Divergence in monetary policy is not the only factor supporting the USDTRY uptrend. Along with a permanently negative current account balance, Turkey faced a budget deficit of 78.6 billion liras ($4.2 billion) in September as spending grew faster than income. In August, there was a surplus of 3.6 billion liras. How to lure foreign investors into local assets to finance a double deficit if government policy goes against economic theory?
The divergence in Fed-CBRT monetary policy, double budget and current account deficits, and deeply negative borrowing rates should have dragged the lira to the bottom. However, USDTRY fluctuates for the third week near 18.55. Apparently, Turkish officials are using interventions to stabilize the country’s foreign exchange market.
Monthly USDTRY trading plan
This cannot go on forever. A decrease in the key rate by 100 bps from 12% to 11% on October 20 can cause a breakout of resistance at 18.6 and become a reason for the formation of USDTRY long trades. Levels 18.8 and 19.1 serve as targets for the USDTRY uptrend.
Price chart of USDTRY in real time mode
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