FX.co ★ Global macro overview for 29/05/2018

The Central Bank of the Republic of Turkey decided on a long-awaited reform of interest rates, adapting to global standards. From 1 June 2018, the existing interest rates will be replaced by a standard known from major central banks. The reference rate - in case of Turkey, the interest rate on weekly repo operations - will be equal to the current LLW rate and will amount to 16.50%. In addition to the basic rate, interest rates on loans and deposits at the Turkish central bank will operate. They will be respectively 150 basis points (1.5 percentage points) higher (in the case of loans) and lower (in the case of deposits) than the reference rate.

For the last two years, the Central Bank of the Republic of Turkey has been pursuing a rather curious policy of interest rates. The official rate after the symbolic increase at the beginning of 2017 remains unchanged at the level of 8.00%. Several times the interest rate called the "Late Liquidity Window" (LLW) was raised - in practice, it was the price that set the price of money for Turkish banks.

It is an open secret that the LLW was introduced so that Turkey's ruler Recep Tayyip Erdogan would not see interest rate increases. Thanks to this, TCMB was able to increase interest rates on loans and at the same time show that the interest rate is not rising. However, the Turkish "sultan", famous for hostility to high-interest rates, finally realized in this mystification what paralyzed the monetary policy of Turkey.

The central bank had its hands tied and could not react to the rise in inflation, the outflow of foreign capital and the weakening of the lira. But it looks like the situation has changed. On Wednesday TCMB made an unannounced, "emergency" rate increase of LLW by a solid 300 bp. The decision was probably made with the permission of Erdogan, who also reassured investors and assured that Turkey would respect global standards in monetary policy. Yesterday's TCMB's announcement about "civilization" of the interest rate system seems to confirm the sobering up of the authorities in Ankara.

Let's now take a look at the USD/TRY technical picture at the H1 time frame. The market has not made any new high since the top at the level of 4.9268 and is still trading below the navy trend line. The intraday Double Bottom pattern formed recently at the level of 4.5555 might be challenged soon. If the supply side will manage to break out below this level, the next immediate support is seen at 4.5367, but the more important support is seen at the level of 4.4996. The nearest resistance is seen at the level of 4.6814.