USD/TRY bursts back above 8.00, as higher oil prices and ongoing diplomatic tensions weigh on lira

• Having flirted with the 8.00 level earlier during Tuesday’s European morning, USD/TRY has convincingly broken this level to the upside in recent trade.
• Higher oil prices, weak manufacturing data and ongoing diplomatic disputes with the EU are all weighing on sentiment.

The Turkish Lira has been on the defensive for a second day, with USD/TRY moving convincingly above the 8.00 level in recent trade, having flirted with a break above this level earlier during the European morning. As things stand right now, the pair trades with gains of nearly 1500 pips or 1.8% on the day.

TRY sell-off continues amid rising oil prices, ongoing diplomatic disputes

Poor data this morning in the form of a drop in manufacturing confidence in November to 103.9 from 108.1 set the negative tone for the day, but TRY investors seem to have their focus more on other themes, such as ongoing diplomatic disputes with the EU as well as rising oil prices.

On the latter, WTI is up nearly 5% on the day, rising to its highest levels since March, while Brent is up nearly 4% on the day, with the front-month futures contract rising almost as high as the $48 per barrel mark – this has, of course, benefitted oil-exporting nations (BRL, MXN, RUB, CAD, NOK) at the expense of oil import-dependent currencies such as TRY.

Meanwhile, the EU and Turkey are bickering over an EU military mission, which saw German forces board and search a Turkish cargo ship that they suspected of taking weapons to Libya illegally. Turkey summoned the EU, German and Italian envoys on Tuesday, and Germany called Turkish complaints unjustified.

While this mini-episode might be somewhat petty, it serves as a reminder of fraying relations with the EU, which consumes 50% of Turkish exports.

Looking ahead, attention is set to return to the CBRT with the release of the minutes from last week’s rate decision on Thursday. The CBRT’s recently appointed new Governor Naci Agbal has been talking a big game about continued monetary tightening in order to bring about stabler financial conditions but has cautioned that domestic reforms are needed for a sustained appreciation in TRY.

USD/TRY clears final key technical hurdle, opens door for test of ATHs

In surging above key levels of resistance located in the upper 7.90s and also above the psychological 8.00 mark, USD/TRY has opened the door, technically speaking, for a sustained move back toward all-time highs above 8.50.

Such a move seems unlikely from a fundamental standpoint, given Turkish President Erdogan’s recent change in heart regarding economic/monetary policy and subsequent replacement of the head of the CBRT, which has signalled more hikes ahead following last week’s 475bps rate increase.

But technically speaking, very few notable levels of resistance stand between USD/TRY at present levels and the all-time high set back on 6 November, aside from perhaps the high of 10 November at 8.39.

To the downside, there is plenty of support in the upper 7.90s, then again at 7.90 (12 November high), then again at just below 7.80. TRY bulls will be hoping that the pair can eventually recover all the way back to last Thursday’s lows at 7.50.

USD/TRY four-hour chart