As I watch the entire USD/TRY move unravel from last nights headless chicken act in Turkey, you’ve got to wonder what goes through the minds of some central bankers. Upping your interest rate by over 50% isn’t what most would consider being within the realms of price stability.
Turkey was in all the headlines yesterday and I think they took the opportunity to do some grandstanding. Despite the real inflation worries the move comes after intervention in the currency, so in my mind that was the real reason behind the hikes last night. Will it work? Probably not. If there’s one thing that likely to cane your currency it’s a panic move like that. While trying to stabilise your currency all you are telling the market is that you haven’t got a grip on the situation and that is likely to only make things worse.
This day had been coming for EM’s for a long long time so it should have been no surprise what would happen. The fact that they now cannot cope with the moves is purely because they haven’t planned for this “rainy day”, something that was levelled at central banks and governments before the GFC.
The end of QE is going to happen and a global adjustment in currencies is under way. There’s not a lot countries can do to stop it but how much damage it does is solely down to them and the planning they did or didn’t put in place in advance. After the tide has finished going out we’ll know how many economies will be left high and dry. What’s left to be seen is how many others will follow suit and start raising rates and intervening.
Until then it will be no surprise to me to see the whole of this USD/TRY move completely reverse and even re-try the highs at 2.3890. As the saying goes, you can’t fight the Fed.