We consistently kept urging for upside risks of USDTRY from the recent past ever since the CBRT’s rate cut in last week, Moody’s downgrading has been the double whammy for USDTRY, as the pair has been spiking considerably.

The pair has risen sharply in the past two days as President Recep Tayyip Erdogan has formally recommended extension of the state of emergency for another three months.

What is more, in a speech, he remarked that even twelve months of the emergency rule might not be enough to eradicate terrorist threats.

We had been anticipating at least one extension of the state of emergency. The good news is that opposition parties are still not complaining that AKP is using the emergency rule to bypass democracy. This had been a major concern.

Nevertheless, the longer emergency rule drags on, the less patient opposition parties will become.

This would then sour the cooperative environment which prevailed initially after the failed coup; and of course, it will prevent big forward-looking project commitments from being made in the private sector.

We forecast 2.3% GDP growth this year, decelerating further to 1.9% next year.

We had already recommended writing OTM options would serve more efficient in dealing with pair, and for now we reckon diagonal combinations seems to be more relevant option strategy to monitor USDTRY swings (that takes care of both central banks’ policy actions), thus, the strategy reads this way, long in 2m ATM 0.51 delta call option while shorting 1m (1%) out of the money put with positive theta or closer to zero for time decay advantage on shorter tenors on short side).

Using the ongoing bullish sentiments of this pair, it is wise to deploy shorts in out of the money puts that would finance the long leg of the strategy.