Turkey's Gigantic Rate Hike Ignites A Stock And Aussie Dollar Rally

Getty/Dmitry Korotayev

The Turkish Central bank, in a move aimed at stemming the massive losses in the Turkish lira against the US dollar and the euro since December, has raised rates from 7.75% to 12% this morning Asian time.

That’s a huge move – even the most aggressive call was for rates to only go to 10%.

This action immediately saw the US dollar-lira exchange rate drop from 2.25 to around 2.18 where it sits now.

Chart: Yahoo Finance

As Mamta Badkar from Business Insider US noted in her piece after the announcement, the Central Bank said, “Recent domestic and external developments are having an adverse impact on risk perceptions, leading to a significant depreciation in the Turkish lira and a pronounced increase in the risk premium.”

This is the second move by an emerging market central bank in the last two days to try to “shock” markets into leaving their currency alone. Yesterday the Reserve Bank of India unexpectedly raised rates to 8% from 7.75% when the market expected no change.

In what appears to be a risk-on move subsequent to the Turkish move, the reaction in US futures markets has been for the S&P futures to rally 20 points at one stage and they are now trading at 1795 while the Aussie dollar is also higher, trading at 0.8799.

Joe La Vorgna of Deutsche Bank tweeted that: “This Aggressive action may stabilise EM sentiment” while Sebastian Galy from Societe Generale said the move “is going to leave some dead bodies in spec world and kegs of champagne in others.”

But like the Indian rupee, the Turkish lira has been under pressure for some time and emerging markets have been seeing cash outflows for an extended period as we discussed again yesterday so maybe just maybe the Turkish Central Bank, Stock and Aussie dollar bulls might have a quiet beer and leave the Champagne for a few days.

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