EURTRY – another devaluation ahead?

The EURTRY monthly chart shows that the 5-6 year consolidation after a devastating devaluation comes to an end. Turkey used to be a country with inflation of 60-100% until the IMF taught the current government the accomplishments of the Greenspan doctrine ‘just make people believe inflation is low by cooking statistics’ – since that time inflation even officially dropped to single digits. Everybody living in that country knows it is rather in the upper 20’s but the artificial strong currency helped indeed to reduce inflation since the overvalued Lira had a deflationary effect but still inflation was far higher than statistics show. Turkey was a favorite target for the carry-trade since you could make 20% a year plus at some points even currency gains on top for a while and the central bank took care that trade was running well until lately. The denial was deep in Turkey that the global financial crises might have an effect, which was a dangerous gamble by the current government as the PM even declared everything was contained – where did I hear those famous last words again (Bernanke, Paulson) but Turkey’s PM does not have a MBA from Harvard so it might be more consistent one might think. As it turns out, for the sake of Harvard, it’s not just a Harvard MBA problem – I am sure fine people made their scholarship there as well – it’s just a coincidence that Bush, Bernanke and Paulson were trained at this highly regarded school.

The technical outlook for the TRY is alarming. It broke out of a 2 year triangle pattern and has a target of 2.60. The rule of higher highs and higher lows has even been completed within this 6 year consolidation within the channel 1.50-2.00. We are now in the process of establishing a quantum leap and switch to a higher level, which might be a new band of 200- 2.50. But I rather think we will be facing more a 2.50-3.00 band once the dust settles down. For now 2.50/60 is the target within 6-7 months but that is still the the world goes recession scenario of the regular kind adjustment.

Turkey had a huge boom in construction and sales came to a standstill a year ago – banks were eagerly pumping credits into the economy and borrowed US$, which comes very expensive right now as did the corporate world as well. I do not think this carry-trades have been unwound so far. The current government thought their power was casted in stone which is obviously deteriorating on a daily basis. The prospects internally are getting worse and the global economy will do its part. The central bank is in the dilemma in order to defend the currency they might be forced to raise rates sharply, although the economy rather needs rate cuts – let’s see how that turns out but in the end. Turkey might return to the old cycle of raising rates again

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~ by behindthematrix on October 23, 2008.

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