The USD/TRY nosedived on Thursday after a surprise rate hike by the Turkish Central Bank (CBRT). It declined to 7.3250, which was 6% below the highest point this year.
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CBRT hikes rates
The Turkish central bank surprised market participants when it made a bigger rate hike than expected. It rose the benchmark one-week repo rate from 17.0% to 19.0%. This was a bigger hike than the median estimate of 18%. It was also the first rate hike in three months.
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Further, the bank hiked the overnight borrowing rate from 15.50% to 17.50% and the lending rate from 18.50% to 20.50%.
The bank, under the new governor, Naci Agbal has made three rate hikes in the past few months. These hikes have helped stabilise the Turkish lira, which declined to record lows last year.
The rate hike is mostly because of the runaway inflation in Turkey as commodity prices soar. For example, oil prices have jumped from $15 a barrel in March last year to almost $70. Other commodities like copper and iron ore have also rallied. This has pushed the headline Turkish consumer price index (CPI) rally to more than 3.50%. The bank has put a target of the rate to rise to 5% in the next two years.
Turkey is not the only emerging market country to push or consider rate hikes. Earlier today, the Brazilian Central Bank raised rates from 2.0% to 2.75%. This was higher than the median estimate of 2.50%. The South African Central Bank is also considering raising rates in the next few months while the Russian Central Bank could hike tomorrow.
USD/TRY technical outlook
The USD/TRY declined sharply today as investors in forex reacted to the CBRT interest rate decision. It declined to 7.3250, which is slightly below the 25-day and 15-day exponential moving averages (EMA). The Relative Strength Index (RSI) has also retreated while the price has fallen to the 50% Fibonacci retracement level.
Therefore, the divergence between a dovish Fed and a hawkish CBRT could see the pair drop to the 61.8% retracement level at 7.2360. However, a move above 7.600 will invalidate this prediction.