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Turkish lira under downside pressure, drops below 5.60

After briefly moving above the 5.61 handle, USDTRY met some selling impetus and is now returning to the sub-5.60 region.

Turkish lira has rapidly regained the composure after dropping to the 5.63 area vs. the greenback in the wake of President Trump’s announcement of further tariffs on Chinese products late on Thursday.

The upbeat tone around the Lira, however, remains pretty firm following last week’s reduction of the One-Week Repo Rate to 19.75% (from 24.0%). In this regard, state-owned banks have commenced lowering their rates on consumer, housing and corporate loans, all amidst positive comments from Finmin B.Albayrak, who emphasized the positive impact of the rebalancing period on the market.

Later in the day, volatility around the pair is expected to return in light of the release of US Non-farm Payrolls for the month of July (169K forecasted).

What to look for around TRY
The Lira continues to digest very well the large interest rate cut by the CBRT last week. Newly appointed Governor M.Uysal appears to have inaugurated an Erdogan-sponsored easing cycle. Whether this move was untimely (as regarded before the rate cut) it remains to be seen.

In the meantime, TRY remains supported by the ongoing ‘hunt for yield’, as domestic rates still look attractive in spite of the recent cut. However, the lack of solid progress on the US-China trade dispute and its negative impact on prospects of global growth carries the potential to spark quick and strong outflows from TRY, undermining the ongoing recovery and threatening at the same time to spark another crisis in the currency.

On the more macro view, the country needs to implement the much-needed structural reforms (announced in April) to bring in more stability to the currency and sustain a serious recovery in both economic activity and credibility.

USDTRY technical analysis
At the moment the pair is losing 0.16% at 5.5930 and faces the next support at 5.5151 (monthly low Jul31) followed by 5.2918 (monthly low Mar.29) and then 5.1594 (2019 low Jan.31). On the flip side, a surpass of 5.6595 (21-day SMA) would expose 5.7727 (high Jul.25) and finally 5.7849 (monthly high Jul.8).

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