Financial market research and analysis

Lira gains as carry trades flourish on Powell’s comments

Turkish lira extended gains against the US dollar after the Federal Reserve (Fed) Governor Jerome Powell said that the Fed is ready to cut interest rates, if necessary, to give support to the financial markets amid increasing downside pressures on the economy due to the worsening US-China trade tensions.

The sharp downside move on the US yields boosted the carry trades, seeking profit on interest rate differential. The US 10-year yield dived to 2.05% for the first time since September 2017. The Turkey-US 10-year government bond yield spread surged to the highest year-to-date levels in May and remained above levels last seen in November 2018.

Turkish lira recovered past 10% against the greenback since its May dip and has been the third best performer among all world currencies against the US dollar this week. The USDTRY traded below the 5.70 mark for the first time since April. The trend and momentum indicators point at a further lira appreciation, with the 200-day moving average (5.53) now being the first major target for the USDTRY shorts.

Will ‘Everything Be Fine*’ for the lira?

While the actual carry-friendly market environment seems favorable for the Turkish lira at the first glance, traders should remain cautious with their long lira positions in the coming weeks.

In fact, Istanbul, Turkey’s leading city and the major financial hub, is preparing for a controversial rerun of the mayor election in June 23^rd, after a much-debated recount of votes following the May election failed to offer victory to AKP’s candidate Binali Yildirim, who is openly and firmly supported by President Erdogan, and led to the cancellation of the election altogether, but only in Istanbul. Of course, the annulment of the Istanbul election surged the political tensions across the country and the fragile political atmosphere could reverse the sentiment in lira at any time. As a result, the Turkish lira rally could remain short-lived if carry traders hurry up taking profit and get out of their long-TRY positions before the political scene gets ugly again, after the Eid break.

From a technical standpoint, a potential reversal in USDTRY’s downside trend is expected to see resistance at 5.8620 (the major 38.2% retracement on May – June pullback), but surpassing this level should hint at a mid-term bullish reversal and encourage a further advance to 5.9255 (50% retracement) before the 6.00 mark (psychological level & major 61.8% retracement).

* The opposition CHP party’s candidate Ekrem Imamoglu’s campaign sentence ‘Hersey Cok Guzel Olacak’, meaning ‘Everything Will Be Fine’