Central-Bank Independence Threatened In Russia, Turkey
Matthew Weller | Feb 02, 2015 03:01PM ET
It’s been a relatively slow start to the FX trading week but volatility is sure to pick up, starting by the end of U.S. trade Monday. In the G10 universe, fireworks are likely around Monday night's hotly debated RBA meeting, followed in short order by PMI reports from other developed countries and, of course, the always-exciting Non-Farm Payroll report on Friday. Meanwhile, emerging markets could also hold some surprises for FX traders, especially when it comes to central-bank meetings.
What Is Russia Doing?
Last Friday’s Russian central-bank meeting provides a relevant template. Most economists were expecting no change after December’s massive 650bps hike to defend the ruble, but the Bank instead chose to cut rates by 200bps back down to 15%. This move initially perplexed traders; like politicians, central banks rarely reverse decisions so quickly, as it can hurt their credibility moving forward. Indeed, Russia’s central-bank chair, Elvira Nabuillina, stated just a week ago that there was no chance of a rate cut any time soon.The bank’s boilerplate rationalization that it decided to shift its focus from inflation and the ruble to struggling economic growth was hardly convincing. But then an alternative explanation emerged over the weekend.
Some traders have started to speculate that the Russian government pressured the central bank into cutting interest rates in order to support the ailing banking sector and labor market. After all, around the same time that Nabuillina was ruling out any rate hikes, a vocal Russian government aid indicated that the Kremlin would like to see a cut to boost the struggling economy. In this context, the rate cut makes much more sense as politicians are more concerned with the short-term impact of a poor economy and high unemployment than slower-burning issues like elevated inflation.
Russia’s central bank has, of course, denied any government involvement, but regardless of whether the flip-flop was a result of a rapid change in the priority of economic concerns or political meddling, the damage to the central bank’s credibility is the same. USD/RUB seems to have taken the shift in policy in stride thus far, but if oil takes another leg lower or evidence of political influence on the CBR emerges, USD/RUB could easily break 70 and retest December’s panic highs near 75.00.
USD/TRY: Could Turkey’s Central Bank be Next?
The most direct comparison to the situation in Russia comes from Turkey, where President Erdogan has been consistently critical of the CBRT. A perception that the government was influencing monetary policy contributed to the lira’s collapse early last year and EM FX traders are growing increasingly concerned that a similar dynamic may be in play this week. In the wake of comments from President Erdogan that interest rates were too high and “should be fixed,” CBRT Governor Basci said that the central bank was considering calling an extraordinary meeting to cut interest rates pending the result of Tuesday’s inflation report. As with Russia, the market’s perception of central-bank independence is of the utmost importance and a cut on Tuesday could undermine that confidence.
Get The News You Want
On a technical basis, USD/TRY has already rallied to an all-time high above 2.40. The trend remains strongly bullish, and the MACD supports the upward trend, with the indicator trending higher above its signal line and the “0” level. Moving forward, the previous high at 2.41 may now provide support and if the CBRT chooses to cut rates, buyers could start to turn their eyes toward key psychological resistance at 2.50 next.
Source: FOREX.com
For more intraday analysis and market updates, follow us on twitter (@MWellerFX and @FOREXcom)
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.