FxWirePro: Deploy USD/TRY RV derivative trades as Turkish lira hits record lows

The lira hit record lows against the USD and the EUR yesterday. Yet, there was no sign, no proof of life, from the central bank. CBT last reacted saying that it was closely watching unhealthy price developments when USDTRY surpassed 4.50; yesterday this level was oscillating, however, there was complete stillness. Quotes from local brokers asking God to help Turkey made Bloomberg headlines.

In our view, no one can help except the central bank itself; we argued on these pages last week that the message does not appear to be clear for policymakers yet; there are frequent discussions by commentators about whether CBT will wait until its next MPC meeting on 7 June.

In our opinion, such a choice does not even exist. The same rate hike, which could have stabilized USDTRY at 4.00 if undertaken last month will only succeed in holding the exchange rate down at 4.30-4.50 if undertaken now, and this level will move up to (guess!) 6.00 if done in June. The market is testing CBT's resolve and independence; it will keep moving unless we have proof of life.

Hence, we advocate below derivatives strategy with a view to arresting further upside risks.

Trade recommendation: Short 1Yx1Y USDTRY FVAs vs buy 6m ATM +0.51 delta call options.

Currency Strength Index: FxWirePro's hourly USD spot index has shown -78 (which is bearish) while articulating at 14:12 GMT. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/fxwire/currencyindex

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