It’s been a relatively slow start to the FX trading week, but volatility is sure to pick up, starting in just a few hours. In the G10 universe, fireworks are likely around tonight’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 in Tarnation 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 Rossii 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 the bank decided to shift its focus from inflation and the ruble to struggling economic growth was hardly convincing, but 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. USDRUB 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, USDRUB could easily break 70 and retest December’s panic highs near 75/80.
USDTRY: Could Turkey’s Central Bank be Next?
The most direct comparison to the situation in Russia is in Turkey, where President Erdogan has been consistently critical of the CBRT. A perception that the government was influence 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 central bank was considering calling an extraordinary meeting to cut interest rates pending the result of tomorrow’s inflation report. As with Russia, the market’s perception of central bank independence is of the utmost importance, and a cut tomorrow could undermine that confidence.
On a technical basis, USDTRY 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.