Turkish strengthened significantly last night as Moody’s raised the Government bond ratings to Baa3, the lowest investment grade but nonetheless a huge milestone considering that this is the first time in 2 decades that Turkey received such a rating. The Istanbul stock index jumped 1.3%, reaching the highest level since 1988 while benchmark 2Y Government bonds fell 12bps to a record low of 4.68%. However, it seems that the Lira is not able to hold onto its gains, with prices weakening during today’s trade.
From a technical perspective, the dip in USD/TRY was significant as it first stopped the bullish Channel breakout a few hours before. Price managed to break Channel Bottom in the next hour of trade, pushing below 1.825 but was unable to push further despite the bearish Channel breakout, suggesting that the incumbent bulls are still strong. Today’s bullish recovery back into the Channel suggest that the immediate bearish threat has been negated, and hint that bulls may be back in play again, with Channel top as potential target.
EUR/TRY Hourly Chart
As USD has been extremely strong in recent days, it is important for us to see if the rally in USD/TRY is purely due to USD strength rather than TRY weakness. Comparing with EUR/TRY, we can see that the recovery rally seen in USD/TRY is indeed due to weakness seen in TRY, which suggest that traders may have discounted the Moody’s event entirely and were generally nonplussed about it, which indicates that USD/JPY rally which is hinting to be back on track may have further roads run.
Weekly chart on USD/TRY is generally bullish, with the rally from 2013 Low not still in play. Price is currently trading just above the 1.83 ceiling which was the previous 2013 High, with 1.88 May 2012 high as possible topside target. The rising trendline may provide some resistance, but should 1.83 confirmed to be broken, bullish pressure should allow the trendline to be broken or perhaps continue to straddle the trendline to move higher. Stochastic readings is also highly bullish with an interim trough already formed.
Fundamentally, Moody’s decision should allow TRY to appreciate in the long run. Turkish Economy Minister Zafer Caglayan said so himself. This appreciation of TRY will help reduce foreign borrowing costs, which is another long-term positive which will help in stocks and further TRY’s strength. However, USD’s current appreciation will put a spanner in the works. Given that TRY wasn’t able to maintain it’s gains earlier, any injection of further USD strength will be able to negate all the gains TRY made following the news. As such, even though fundamentals in Turkey may improve, the overall strength in USD may be able to negate TRY gains, and allow USD/TRY to climb further in 2013.