Since EURTRY failed to break through the 50% Fibonacci retracement at 3.9083 on Friday and RSI is back in neutral territory, I closed my EURTRY short trade at 3.9354 this morning. Having opened the position at 4.0524 on 23 January, this translates into a quick 3.64% spot+carry return. I still like the pair for shorts, but considering the sharp TRY recovery since January I'd rather watch from the sidelines until a new selling opportunity presents itself.
Open positions as of 13/02/2017 08:44am CET:
EURUSD short from 1.0795, unrealized return: +1.51%
Realized YTD return: +4.34% from 3 trades
Total YTD return: +5.85% from 4 trades
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
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!
Thursday saw the Turkish lira (TRY) decline further despite the Turkish central bank's surprise move from Tuesday night to more than double the weekly repo rate to 10 percent (although effectively this was more like a 7 to 10% hike considering that the CB had previously not lent money at the official rate of 4.5%). The decision was all the more bold given Recep Tayyip Erdogan's clear opposition to higher interest rates.
At first, the TRY quickly rebounded from its all-time low against the USD of more than TL2.39 to roughly TL2.16. However, that has only been a temporary breather with hedge funds well aware of Turkey's economic and political challenges as well as the central bank running out of foreign currency reserves. On Thursday, the situation turned worse again following both strong economic data releases from the US and disappointing news from Turkey where it has been reported that the government again removed more than 800 police officials and 90 prosecutors from their positions. The political struggle is far from over, causing further USDTRY volatility.
Other EM currencies faced similar challenges. For instance, the decision in South Africa to carefully raise rates on Wednesday, although a surprise, was not as bold as the rate increase in Turkey and was very short-lived, too. The Rand is among the biggest EM currency losers and currently trades at ZAR 11.21 per USD. Emerging market woes were additionally fuelled by the Federal Reserve's clear stance to continue to reduce its monthly asset purchases. In Ben Bernanke's last speech as Fed chairman, he did not mention the emerging markets with one word, hinting at the US just not caring about the problems of the weaker countries.