FxWirePro: Deploy USD/TRY Debit Call Spreads as Turkish Lira likely To Be Vulnerable Despite Inflationary Control

Minister of Finance Berat Albayrak promised a “significant fall” in inflation in Turkey in an interview over the weekend. He is probably correct in saying that. If he is referring to the year-on-year comparison of prices.

However, that is nothing to do with monetary and financial policies. It is simple arithmetic. As soon the strong inflation shock created by the collapse of the lira in the summer of 2018 is more than a year ago, it is no longer having an effect on the year-on-year comparison of the price data.

Is the FX market really going to fall for an effect that every student in senior should be able to figure out? Albayrak seems to assume so. And USDTRY levels below 6.00 seem to confirm him.

Moreover, large external debt rollover requirements are a key source of TRY pressure. Additionally, with renewed political uncertainty the local dollarization trend could resume. The central bank has so far announced technical measures, which may temporarily slow FX weakness but are unlikely to reverse recent trends, in our view.

The fundamental analyst can only point out that at some stage facts will come to the fore. And those look pretty depressing: as monetary policy is still unwilling to control inflation – regardless of year-on-year rates – inflation continues to put pressure on the lira.

Trade tips: 3m USDTRY debit call spreads are advocated with a view to arresting upside risks. Initiate 3m 5.50/6.54 call spreads at net debit. Thereby, one achieves hedging objective as the deep in the money call option with a very strong delta will move in tandem with the underlying spikes (spot reference: 6.0955 levels).

The rationale for the trading: Please observe that the above technical chart is also clearly indicating the further upside risks. 

It seems that hedgers of TRY are well-balanced on either side with the above fundamental factors. IVs of this underlying pair is on the higher side, trending highest among the G20 FX space. Call options with a higher IVs cost more, because, increasing IV is desirable for the holder of the option, just for an intuition that the higher likelihood of the market ‘swinging’ in holder’s favor. Please also be noted short-dated options are less sensitive to IV, while long-dated is more sensitive. Courtesy: Commerzbank, Sentry & Tradingview.com

Currency Strength Index: FxWirePro's hourly USD spot index is flashing -39 (which is mildly bearish), at press time 14:01 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex