USD/TRY – Central Bank’s Index shows Overvalued Lira

The Lira weakened yesterday after the Central Bank of the Republic of Turkey (CBRT)’s Real Effective Exchange Rate (REER) crossed 120.0, the level which Governor Erdem Basci said could prompt policy action previously. This increased speculation of a rate cut by CBRT in their February policy meeting, pushing USD/TRY back above 1.76 levels.

A rate cut this month will be significant, considering that the last amendment to policy rate was in Dec 2010, more than 2 years ago. Before that, CBRT has been aggressively slashing rates which saw the benchmark rate fell from a 2009 high of 8.75% to current 1.50%. Basci and co. must seriously mull over the benefits for a rate cut now as there isn’t a lot of room left for them to ease.

To make matter worse, CPI in January climbed above 7% Y/Y versus a target of 5%, giving CBRT even lesser room to wiggle. As such Basci could potentially wait for the REER to hit 125, the upperband of CBRT tolerance level, before pressing the trigger on the 19th Feb meeting.

Daily Chart

With Lira falling behind slightly, the likelihood of REER pushing to 125.0 decreases. However the mid-term trend is still down after price breaking 1.77. Stochastic hints of a bottom around 1.75 with Stoch and Signal line crossing, however a true bullish reversal scenario can only be confirmed should price break above 1.77 to open up 1.81 bullish target. 1.78 which has been acting as support back in Dec can also provide interim resistance against further upside.

Weekly Chart

Weekly Chart shows further significant support at 1.74, which price has failed to test for now. Importance of 1.78 as resistance is even more apparent on this chart. Failure to breach 1.78 will continue to weigh prices towards 1.74, which could be the catalyst that push the REER to 125.0 and prompt CBRT’s reply.

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