FxWirePro: March appears to be murky for Turkish lira – Uphold long hedge

The Turkish lira has weakened through March and slipped noticeably during trading yesterday, with the TRY basket exchange rate (vs. half EUR, half USD) ending up 2.3% weaker compared with the beginning of March. A number of clients asked what was driving this.

No clarity so far – no particular new information appeared to be on the move. However, in general, the fundamental driving forces for the lira have been on the weak ground:

1) Core inflation is double-digit and the current-account deficit has been widening out rapidly over the past quarter;

2) This backdrop inevitably comes into greater focus when an FOMC meeting approaches and the Fed is readying to hike rates;

3) The US and global bond yields are firm and on a rising trend;

4) Turkey's sovereign rating was recently lowered further into junk by Moody's;

5) German Chancellor Merkel had made friendly overtures towards Turkey last month on the release of a high-profile German journalist from prison, but this week, she ruled out a customs union with Turkey;

6) There had been calming news trickling in about US-Turkish military cooperation in Syria under Rex Tillerson – now we have to wait and watch whether Mr. Pompeo will be equally friendly or not.

This is how we could infer on a conveniently chosen list of recent developments that are in the direction of the observed market move (as if such events were not occurring all these past weeks when the lira was super-stable)! (Never get baffled again). This is a lesson for us not to ignore economic fundamentals just because the market has been calm for a while – there is no guarantee when and where they will strike.

We stick with our USDTRY forecast of 3.90 for mid-2018 and 4.00 by the end of 2018.

Moreover, it is projected that the further sharp FX weakness to force the central bank into a more credible tightening. While we remain UW FX and hold an outright USDTRY ATM +0.51 delta call (spot reference: 3.8640 levels) of 3m tenors. You hold this derivative contract on both hedging as well as trading grounds, please observe payoff structure that flies exponentially as the underlying spot FX keeps spiking northwards.

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