FxWirePro: TRY calls and RUB puts – Snippets of driving forces and trade radar of CEEMEA FX

Emerging market currencies are set to remain challenged by the risk of an escalating trade war, lower commodity prices and a stronger USD near-term and rising US rates and tighter US liquidity over the medium term. Notably, TRY has suffered driven by political developments but otherwise we see the risk of a contagious sell-off as limited, as the likelihood of significant further USD strength is small after all. With the ECB, effectively on hold and wage-price pressure mounting in, notably, Eastern Europe, these currencies in particular should stay supported vis-à-vis the EUR near term. 

TRY: Sometimes just hearing the announcement gives one a nagging feeling as the speech by Finance Minister, Berat Albayrak, today, presents his new economic model for Turkey. Some points have already been leaked: first of all, the growth forecast has been reduced a little. The economy is going to record growth levels of 3% to 4% now rather than 5.5%. In view of the country’s difficult situation that may be optimistic, but at least the adjustment is in the right direction. Contrary to the situation with inflation. The Ministry of Finance is already talking about single digit rates again which are going to be reached “as soon as possible”. 

The Turkish lira has entered another perfect storm, as shaky macro fundamentals are eroded by the high oil price, weak emerging market sentiment and the returning personal grip of President Recep Erdogan on the economic processes, TRY and monetary policy. The markets continue to dislike this kind of interference, now pricing extremely high TRY hedging. We expect the TRY sell-off to calm down, if the President announces a fiscal austerity programme and signals more central bank independency. 

USDTRY is expected to slide down slightly from the current levels in the near term, updating the forecast as following: 5.70 in 1M, 4.80 in 3M, 4.90 in 6M (previously 4.35) and 5.10 in 12M.

Contemplating above driving factors, on hedging grounds we initiate RV trade - 3m USDTRY put up-and-in Short USDTRY.

RUB: How nervous the currency market is about sanctions could be seen yesterday in the development of the ruble. After a proposal for a Senate bill for further sanctions against Russia reached the public, the RUB lost over 2%. It did not matter that it was merely a draft that (although brought in by democrats and republicans alike) will have little chance of implementation. 

Nevertheless, the behaviour of the market is not irrational. If the sanctions contained in the draft were actually to take effect, Russian banks would probably find access to international markets extremely difficult. 

European banks would then also no longer be able to do business with their Russian partners without having to fear sanctions from the US. The market priced in such a considerable risk yesterday, even if the probability for this is quite low. The RUB is unlikely to change its trend in near-terms as the market sentiment eyes on the announcement of sanctions due to a poison gas attack on a Russian double agent. 

Trade tips: 06-Sep-18 USDRUB 1x1
call spread (69.500/64.350), marked 0.92% - spot reference: 67.167 levels.

Currency Strength Index: FxWirePro's hourly USD is inching at 82 (which is bullish), while articulating (at 13:04 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex