FxWirePro: Spotlight on Turkish Lira and USD/TRY derivatives trades

Turkey published CPI data for February this morning. The market expected continued improvement after a favorable reading in January. However, the headline inflation rate didn’t moderate notably, standing at 10.26% after 10.35% in January.

Hence the market is disappointed because the other key driver for the lira – the trade deficit – already received bad news last week when import growth surged by 38% YoY in January and the rolling trade deficit reached 10% of GDP. The disappointing January CPI data means that both key lira drivers are deteriorating – which impacts the currency negatively. The moderation in January inflation was driven by volatile categories – core inflation softened only by a tiny fraction – hence, there was always the risk that the headline reading could reverse in the next reading.

Overall, the lira has been more stable recently, and therefore the tendency for inflation will be to peak and moderate – but only slightly, say to around 9% in the coming months. This extent of moderation will not neutralize Turkey’s long-term inflation, though – at best, it can bring near-term relief. In the medium-term term, we, therefore, expect USDTRY to head up towards the 4.00 mark.

Trading tips:

Sell 1Yx1Y USDTRY FVA vs buy 1Y ATM call.

Buy USDTRY call (4.00) and EURTRY call (4.83) (equal weighted USD notional).

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