USD/TRY consolidates above 11.00 as traders mull whats next for the battered lira

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  • USD/TRY has pulled back from record highs near 11.30, but has consolidated above 11.00.
  • The CBRT triggered the crash in the lira’s value by pressing ahead with a 100bps rate cut.

USD/TRY surged to record highs on Thursday as the Turkish central bank pressed ahead with a widely anticipated, but also widely derided, 100bps rate cut that took the country’s benchmark interest rate to 15.0%. Turkish Consumer Price Inflation neared 20% in October, meaning that Turkey now has a real interest rate on bank deposits of about -5.0% (based on the current rate of CPI), on of the worst returns of any developed market.

USD/TRY surged from around 10.50 prior to the rate decision to print fresh record highs near 11.30. Over the last few hours, the pair has backed away from highs, though has broadly remained supported above 11.00, with a dip back to Wednesday’s highs at 10.95 aggressively bought. As things stand, the pair is set to post a 3.5% gain on the day.

Prior to the CBRT rate decision, the Turkish lira had already weakened by more than 5.0% versus the USD on the week and some had hoped this would deter the bank from going ahead with the 100bps hike. But it was not to be. The CBRT again buckled to pressure from President Recep Erdogan to lower interest rates. Erdogan holds the unorthodox belief that lowering interest rates bring down inflation as opposed to raising interest rates and now has a long track record of firing CBRT governors or policymakers who hike or don’t lower interest rates fast enough.

Since the CBRT started cutting interest rates back in September, the lira has lost more than a third of its value versus the US dollar. The escalating currency crisis reflects the market view that the CBRT, due to Erdogan’s interference, is not going to be able to get a grip on Turkish inflation, let alone get it back to the bank’s 5.0% target. Holders of Turkish denominated assets are rushing for the exit amid fears the country is headed for hyperinflation and economic ruin. The CBRT hinted that another rate cut be coming in December. The outlook for the lira remains dire.