The USD/TRY exchange rate bounced back, and was heading back to its all-time high after Turkey published a stronger-than-expected jobs report. It rose to a high of 34.23, its highest level since August 28, and a few points below its all-time high of 34.37.
Turkey inflation is still elevated
The Turkish statistics agency published the September inflation data on Thursday. The report said that the headline Consumer Price Index (CPI) rose from 2.47% in August to 2.97% in September, higher than the median estimate of 2.20%.
It slowed from 51.97% to 49.38% on an annual basis, also higher than the median estimate of 48.3%. It was the lowest inflation figure since July last year and was substantially lower than the year-to-date high of 71%.
Core inflation, which excludes the volatile food and energy products, retreated from 51.6% in August to 49.1%. It then rose from 3.0% to 3.6% on a month-on-month basis.
These numbers mean that Turkey’s inflation was moving in the right direction, albeit at a slower pace than expected. In an ideal situation, the Central Bank of the Republic of Turkey (CBRT) would wait for the CPI to continue falling before cutting rates.
Meanwhile, the producer price index retreated from 35.75% in August to 33% in September. It then dropped from 1.68% to 1.37% on a MoM basis.
The USD/TRY also reacted to the country’s forex reserves figures. According to the central bank, net reserves rose from 51.78% to 54.12% in September. Reserves slowed from $94.1 billion to $93.8 billion.
Next actions by the CBRT
Attention turns to what the Central Bank of the Republic of Turkey (CBRT) will do. Analysts expect that it will hold rates steady in the next meeting and then start cutting either in December or in the first quarter of next year.
The CBRT has embraced an orthodox monetary policy since last year, and has delivered several large interest rate hikes. It moved the benchmark rate from 8% in May last year to over 50% today.
Interest rate hikes help to slow a country’s inflation by making cash attractive to investors and by slowing spending.
For a long time, however, the challenge has been that the country’s interest rates have been significantly smaller than inflation. As such, investing in Turkish government bonds attracted a negative real return.
The challenge is that Erdogan, Turkey’s president, may push for fresh interest rate cuts now that inflation has started falling. Rate cuts would likely stimulate higher consumer and producer prices.
The other risk is that Turkey could come under US sanctions if a war breaks out in the Middle East. Historically, Turkey has been one of the biggest Israeli critic to an extent that it has blocked trade with the country.
Some US politicians, especially Republicans, have urged the country to reassess the relationship with Turkey, a NATO member.
USD/TRY analysis
USD/TRY chart by TradingView
The daily chart shows that the USD to TRY exchange rate continued rising after the latest Turkish inflation report. It has remained above the 50-day moving average and the small ascending trendline shown in purple.
The pair’s volume has been heading downwards while it has remained above the ascending purple trendline. Therefore, the path of the least resistance for the USD/TRY pair is upward, with the next point to watch being the all-time high of 34.37. A break above that level will point to more Turkish weakness as bulls target the next psychological point at 34.50.
The alternative scenario is where the falling interest rates in the US push more investors to Turkey, leading to a big decline in the near term.
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