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The campaign surrounding the EU referendum is on the home straight. In less than 24 hours, the polling stations will open and the British electorate will start to decide on the membership of Great Britain in the EU.
Following a veritable tug of war between the remain - and the exit-supporters over the past few weeks, the outcome of the referendum is completely open again just a day before the vote. Even though the remain-camp had a small lead in most polls compiled over the past few days, the leave-camp had recorded a lead of up to 10% in some of the polls compiled in the previous two weeks.
The fact that a YouGov poll put the leave camp in the lead again now when only two days earlier a poll by the same pollster had seen a slight advantage for the remain camp is also worrying.
A long position on TRY volatility may function as an insurance vehicle against the “Brexit” risk.
Notably, volatility in the Turkish lira has lagged behind those of other liquid EMEA currencies such as ZAR and PLN, and we expect that TRY volatility may engage in some catch-up.
Additionally, we believe that political risks may be currently understated in Turkey, in light of the administration’s move toward implementing an executive presidency, a heightened risk of snap elections, and the worrying frequency of on-going terrorist attacks.
Turkey's GDP expanded 0.8 pct on the quarter in the first three months of 2016, slowing from an upwardly revised 1.2 pct expansion in the previous period and boosted by household consumption and government spending; while a contraction in fixed investment dragged expansion down
Although not our base case scenario, we note that aggressive easing by the Central Bank of the Republic of Turkey (CBRT) over the coming months or negative China newsflow may also spill over into heightened volatility in USDTRY, alongside some TRY deterioration.
We recommend a long volatility position via a 3-month at-the-money call option on USDTRY vol, which currently costs 2.6104% in premium (ATMD strike of 2.9816).
This position will benefit if implied volatility continues to rise, or if TRY weakens against USD over the coming months. With 3-month implied volatility currently at 12.11, we target a move higher to 14.11, combined with 3% deterioration in TRY spot.
