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The moment of truth will strike for the Lira on 24th July. Because then the next interest rate decision of the central bank is due.
The Central Bank of Republic of Turkey raised its benchmark interest rate by 125bps to 17.75 percent on June 7th, after a surprise 300bps hike last month to support the lira. Also, policymakers said further monetary tightening will be delivered, if needed. Latest data showed the country's annual inflation jumped to 12.15 percent in May, the second-highest since February 2004, due to higher energy prices and a tumbling currency.
If, at the end of July, what President Erdogan said yesterday proves true, namely that interest rates will fall in the period ahead, the collapse of the lira we saw yesterday is probably just a ridiculous copy of what it might face on 24 July. In this case, capital controls might prove to be unavoidable.
While this outcome is positive for producing a relatively stable government, the risks to the central bank and monetary policy, and hence, the lira outlook have multiplied. Our FX Hotspot from earlier today recaps the main points.
While we hold off moving UW with the CBRT surprising once again. The aggressive 500bps of tightening cumulatively delivered since April 25th is supportive for the currency in the first instance, however, we see a portion of it as merely “catching up”, with inflation accelerating.
At spot reference: 4.8350 levels, please be noted that the positively skewed IVs and forward rates of 1m USDTRY contracts indicate mounting bullish risks (refer above nutshell for IV skews and forward rates).
Despite today's bearish swings, USDTRY edging higher all-time highs, contemplating above driving factors, on hedging grounds we initiate RV trade - 3m USDTRY put up-and-in Short 1m put.
Currency Strength Index: FxWirePro's hourly USD spot index has shown 73 (which is bullish) while articulating at 12:40 GMT.
For more details on the index, please refer below weblink:
