The Turkish lira closed the day with an over 1% gain against the U.S. dollar on Tuesday following the announcement of better-than-expected inflation data, continued to spike against the greenback during Wednesday's trading. For the first time since Aug. 20, the Turkish lira traded below 5.70 per dollar, positively decoupling from other emerging currencies despite a run on the Argentine peso. Prior to the announcement of the inflation rate, which slipped to 15.01% in August and rose 0.86% on a monthly basis, contrary to median forecasts of an increase of 1.4%, the Turkish lira had been trading around 5.73 per dollar. The downward trend in the inflationary pressures reinforced the expectations that market conditions are supportive for a possible rate cut by the central bank. Coupled with the developments in global markets which are predicting loose monetary policy from major central banks, the Turkish lira appreciated against the dollar and closed the Tuesday session at 5.72, posting the best performance among the emerging market currencies.
The dollar/Turkish lira exchange rate continued to depreciate during yesterday's trading. The Turkish lira was trading at 5.67 per dollar at 2:23 p.m. in the afternoon, seeing levels as high as 5.65 in the morning.
The downward trend in inflation is expected to continue in September and October given the base effect of last year's peaking inflation figure, therefore expectations for an interest rate cut from the central bank's monetary policy committee meeting on Sept. 12 have been strengthened. Economists forecast that the central bank will decide on a rate cut of around 200 to 250 basis points.
"Investors feel the weakness in inflation data last month gives the central bank some cover to adjust rates further. We are expecting a 250 basis points cut at the next meeting," said Jason Tuvey, senior emerging markets economist at Capital Economics.
Any probable rate cut by Turkey's central bank is also expected to align with the changing global monetary policies of major central banks. Reuters reported on Tuesday that ECB policymakers are leaning towards a stimulus package that includes a rate cut, a beefed-up pledge to keep rates low for longer and compensation for banks over the side-effects of negative rates.
The Fed this year shifted to an easing stance, boosting emerging market currencies like the lira, and it could cut rates again in two weeks.
In the face of rising inflation, the central bank increased the interest rates to 24% in September 2018, from 17.75% at the time. However, in its July meeting, the bank cut the rates massively by 425 basis points to 19.75%.
Turkey's inflation saw the highest points in September 2018 and October 2018 in more than a decade, hitting 24.52% and 25.24%. The August decline in the consumer price indexes at 15.01 demonstrated the lowest rate in the last 15 months, down 1.64% from August 2018 when inflation was at 17.90%.
While there is no specific benchmark market interest rate for the Turkish bonds, two-year government bonds are generally monitored by the markets. The two-year government bond reached a maximum yield of 30.79% on Aug. 14, 2018. The yield lowered to 15.34% yesterday, down 0.65%.
Turkey's sovereign dollar bonds hit the highest level in nearly a month on Wednesday, extending a four-day run of gains, in anticipation of further interest rate cuts by the central bank.
Longer-dated maturities had the largest gains with the 2038 issue rising 1.1 cents, the most since Aug 7, to 101.2 cents in the dollar, according to Tradeweb.
