The Central Bank of the Republic of Turkey surprised markets today by keeping its benchmark repo rate at 8%. It had been expected to hike the repo rate by at least 50bps to attract more investments in the tattered Turkish lira. Instead, the central bank decided to raise the overnight lending rate from 8.5% to 9.25%. It also hiked the late liquidity window lending rate by 100bps to 11% (commercial lenders have been forced to borrow at the expensive late liquidity window rate since mid-January).
In a first reaction EURTRY jumped by roughly 2% to 4.1090, but the TRY quickly rebounded and is currently trading at 4.0573. The surprise central bank decision might support the TRY in the short term, but a more determined rate hike will be required to substantially bolster the Turkish currency, in my opinion. I'm staying in my EURTRY short trade for now (down by 0.12% as of this writing), because I still expect the Turkish central bank to realize it will have to do more soon. My guess would be a large surprise hike in the repo rate, perhaps combined with another unconventional policy measure to stop the bleeding. Still, I'm well aware of the risk involved in this trade and I'm prepared to close the position if my expectations don't materialize.
Open positions as of 24/01/2017 8:09pm CET:
EURTRY short from 4.0524, unrealized return: -0.12%
Realized YTD return: +0.7% from 2 trades
Total YTD return: +0.58% from 3 trades