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Piotr Matys, EM FX Strategist at Rabobank, explains that Turkish policy makers led by Governor Cetinkaya finally decided to act on Wednesday when they held an extraordinary meeting and raised the late liquidity window lending rate by 300bps to 16.50%, while all other rates were left unchanged.

Key Quotes

“While the much needed hike triggered a sharp correction in USD/TRY from overbought levels, it is too early to declare whether we are witnessing the beginning of a sustainable reversal just yet.”

“To regain its credibility Turkish policy makers may have to seriously consider more hikes, perhaps as soon as on June 7, given that inflation is likely to accelerate in the coming months on the back of significant depreciation of the lira.”

“The 300bps hike is just one step on potentially long path to restore market confidence which has been shuttered over the past few weeks.”

“Looking from the perspective of technical analysis, the price action over the past few weeks implies that a blow off top could be in the making – a sharp rise followed by a sharp retracement.”

“However, confidence is still so low that the downside in USD/TRY is proving limited with buyers stepping in this morning. To shift the short-term bias to the downside, USD/TRY would have to end this week below 4.54~ which provides important support at this stage.”