FxWirePro: Hedge vulnerable Turkish lira amid rising inflation and inactive CBRT

After a brief halt in bullish streaks of USDTRY last weekend, bulls have resumed their business, currently, inching higher at 6.6688 levels.

The TRY crisis has not yet been overcome. There were several notable developments yesterday, but none had a lasting effect on the lira. This is probably because the crisis is evolving along increasingly familiar lines which involve rising inflation and an inactive central bank – day to day developments are beside the point. CPI data surprised to the upside yesterday, with core CPI inflation accelerating to 17.2%, and PPI inflation reaching a menacing 32%. Inflation is indeed dangerously accelerating right now – but then, who is surprised by that? Second, preliminary data from the trade ministry showed that the trade deficit narrowed. 

It would have been good news if the narrowing deficit represented the positive impact of a weaker currency. But, since export growth actually fell sharply, this is not what we are witnessing: rather, the August data probably represent a 'sudden stop' in activity arising out of shock and disruption as the US imposed unexpected tariffs. 

Ultimately, there were remarks from policymakers that there will be an active monetary policy response soon. CBT released a statement on its website promising that it will 'adjust' the monetary policy stance at its 13 September MPC meeting; Finance Minister Albayrak commented that the central bank is fully independent, in fact more so than in other countries, and is about to launch a comprehensive fight against inflation. The lira's lacklustre response to these policy signals highlights the complete lack of credibility which the government and central bank carry at this moment. The first concern is that the central bank may under-deliver. 

As one of the main factors affecting the current account, the trade balance will give a first impression of just how vulnerable TRY was at the end of July. This is due to the fact that foreign investors need attractive conditions to finance Turkey’s current account deficit. 

As long as these external financing needs exist and the central bank does not offer attractive real interest rates the TRY crisis will not have been overcome on a sustainable basis so that the depreciation pressure on TRY will continue. Courtesy: Commerzbank

At spot reference: 6.6842 levels, contemplating above driving factors, on hedging grounds we advocate buying 3m USDTRY call option, short 1m put.

Currency Strength Index: FxWirePro's hourly USD spot index has shown 139 (which is bullish), while articulating at 14:15 GMT. 

For more details on the index, please refer below weblink: 

http://www.fxwirepro.com/currencyindex