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
The Turkish central bank will meet on Tuesday to decide on interest rates. It is expected to raise the benchmark repo rate by 50bp to 8.5%, although it should perhaps hike more (100+bp) to credibly defend the Turkish lira. The central bank might also continue to raise its FX swap auctions rate in an effort to get market swap rates higher as well. This would increase the cost of selling the TRY and - in lieu with a hike in the repo rate - provide additional support to the currency. I'm selling EURTRY at 4.0524.
Open positions as of 23/01/2017 9:18am CET:
EURTRY short from 4.0524, unrealized return: flat
Realized YTD return: +0.7% from 2 trades
Total YTD return: +0.7% from 3 trades
Following yesterday's disastrous Trump press conference I'm buying EURUSD at 1.0646 with a first target at 1.0720 (trendline from 2002). I'm also selling USDTRY at 3.81. Originally, I was going to buy TRY vs EUR to pick up carry but with Trump being the clown that he is I'm hoping for USD weakness in the short term.
Update 3:50 PM CET:
USDTRY short closed at 3.77 for quick 1.06% profit, EURUSD long still open
The TRY lost a staggering 8.9% vs. the USD year-to-date to hit an all-time low amid fears Turkey's president Erdogan might succeed in abolishing democracy in the troubled country. The currency even surpassed the Mexican peso as the worst-performing EM currency relative to the USD.
Things aren't looking much better in EURTRY with the pair hitting 4.1 during early European trading. Given that the carry is very tempting (and with the prospect of the Turkish central bank potentially having to raise interest rates later in January), I'm pondering when to go short EURTRY. However, with negative TRY momentum still going strong I'll refrain from putting on a trade at the moment. Falling knives are falling particularly fast in the case of troubled EM currencies, and I'm not going to catch this one!
Dear beggars, brace yourselves for the return of the ugly US DEBT CEILING! Yes, it's true. Following the momentary suspension of the debt limit in October 2013, the debt ceiling is back in focus as we quickly approach the end of the suspension on 7 February 2014. Although most analysts expect the debt ceiling to be raised before the US Treasury manages to exhaust the limit, which Treasury Secretary Jack Lew says would be at the end of February, investors should consider that this issue is likely to weigh on the US dollar this month. For traders, this may well be an opportunity to enter speculative USD shorts with tight stops and an investment horizon of up to a month, given that February may see increased volatility in USD exchange rates.
For example, we just posted USDTRY short as a high-risk trade idea in light of this issue and the fact that the problems surrounding Turkey have began to cool down following the Turkish central bank's interest rate increase. If you want to stay clear of EM exposure, there is always EURUSD long, but this should only be a short-term trade as we still expect the euro to depreciate versus the dollar in 2014.