The USD/TRY exchange rate surged to a record high this week after the Central Bank of the Republic of Turkey (CBRT) slashed interest rates by 300 basis points. It jumped to 41.05, continuing a trend that has been going on for years.
The CBRT slashed interest rates after recent economic numbers showed that the headline inflation was in a downward trend. A report by the statistics agency showed that the headline CPI dropped from 35.41% in May to 35.05% in June.
The June inflation report was lower than the median estimate of 35.20%. It was the fifth consecutive month that the country’s inflation missed analysts’ estimates.
The falling inflation rate, although higher than in most countries, has boosted the central bank’s confidence to slash rates, a move that will likely cheer President Erdogan. It brought the headline rate to 43% and the borrowing and lending rates to 41.5% and 46%, respectively.
The new interest rate cut has a major implication in the forex market as the USD/TRY is one of the most crowded carry trade globally. A carry trade is a situation where investors borrow a low-interest-rate currency like the US dollar or euro and then invest in a high-yielding ones.
The carry trade has been effective because the Turkish lira has remained fairly stable over the past few months. Now, however, Morgan Stanley believes that the situation may start to change as the spread between the US and Turkish interest rates narrows.
The bank’s analysts also warned that the trade was so crowded because of the sizable returns. Even after the CBRT rate cut, the spread between Turkey’s 43% and US 4.5% interest rates make it highly profitable.
However, its crowded nature as the spread narrows means that it could become highly volatile if many investors start to unwind their positions as we experienced with the Japanese yen last year when the Bank of Japan started hiking interest rates.
The next key catalyst for the USD/TRY exchange rate is the upcoming credit rating updates by Moody’s and Fitch. These companies are likely to drive economic growth and lower inflation.
USD/TRY technical analysis
USDTRY chart by TradingView
The daily chart shows that the USD to TRY exchange rate has been in a bullish trend for years. Most recently, it has formed a narrow ascending channel.
The MAC indicator has remained above the zero line, while the Relative Strength Index (RSI) has moved to the overbought point of 70. Therefore, the pair will likely continue rising as bulls target the next key resistance level at 42.
Read more: USD/TRY forecast: Will the Turkish lira hit 40 in 2025?
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