25.04.201814:18 Forex Analysis & Reviews: Global macro overview for 25/04/2018

Turkish central bank about to hike the benchmark interest rate?

The Central Bank of the Republic of Turkey (TCMB) raised the LLW (Late Liquidity Window ) interest rate from 12.75% to 13.50%, keeping the remaining interest rates unchanged. This long-awaited increase in credit costs was initially well received by the market, but it did not resolve all doubts about the credibility of the TCMB's monetary policy. The previous increase in the LLW rate took place in December 2017 and amounted to 50 bp. Then the scale of the increase clearly disappointed investors. Overnight rates are still 7.25% (deposit) and 9.25% for loans. The Benchmark rate of weekly repo loans is still only 8% and has remained unchanged since mid-2016.

Originally, LLW was conceived as a last-chance instrument for banks that failed to obtain liquidity through overnight loans. It was more expensive, so its popularity was low. The situation changed at the beginning of 2017 when the taps with basic instruments were turned off and commercial banks were somehow forced to use the LLW.

Therefore, the LLW rate of 13.50% is now the main determinant of the money price on the Turkish interbank market. This is a way to raise interest rates "backdoor", so as not to irritate the Erdogan - a fierce enemy of expensive credit.

Turkey is on the verge of a sharp currency crisis. 10% CPI inflation is raging in the country, and the current account deficit has exceeded the alarming level of 6% of GDP. Foreign investors are evacuating capital from the Bosphorus, which is manifested by the record low rates of the Turkish currency. In addition, already on June 24, President Recep Tayyip Erdogan wrote early parliamentary elections, so the LLW rate hike might be seen as a move to stabilize the lira course against the upcoming elections. The depreciation of the currency gives way to Turks by increasing the cost of servicing foreign currency loans and increasing prices of imported goods (especially crude oil). It is also a move that aims to calm the mood among foreign investors who in recent weeks have expressed doubts whether TCMB is able to make the right decisions in the face of pressure from Erdogan.

Let's now take a look at the USD/TRY technical picture in the H1 time frame. The market has made a swing high at the level of 4.1930 on 10th of April and since then the market has been in a corrective cycle with resulted in a local low at the level of 4.000. Today's decision has increased the volatility in USD/TRy as the market first dive towards the trend line dynamic support around the level of 4.0301 and then bounced quickly towards the technical resistance at the level of 4.1124. A violation of this resistance will likely result in a move higher towards the level of 4.1267 and 4.1602.