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The Turkish lira has appreciated further after the Turkish Central Bank (CBRT) hiked interest rates by 475 basis points, pushing the USD/TRY 2.2% lower. The Rabobank FX Analysis Team expects monetary policy divergence to strengthen the lira in the mid-tern and points out to 7.40 as the next key level.

Key quotes

“The newly appointed Governor Agbal made an important step in restoring the CBRT’s credibility by raising the policy rate by 475bps to 15% at today’s meeting. The central bank also simplified the framework of monetary policy as all funding will be provided through the 1-week repo rate.”

The 475bps hike to 15% still makes the lira one of the highest yielding EM currencies. Demand amongst carry trade investors, who profit from substantial interest rate differentials, should improve after the CBRT decided to act and indicated that interest rates will remain high for an extended period of time until inflation converges with the official target.”

“The downside bias in USD/TRY remains intact and the next important level to watch comes at 7.40, as figure 2 illustrates. A break lower would strengthen the bearish bias with a cluster of technical levels at 7.26/23 as next targets.”

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