Efforts by President Erdogan to re-establish social cohesion and uphold democratic ideals while avoiding a shift toward autocracy would likely help to revive market confidence, leading to declines in USDTRY.

Emergency measures by the CBRT to tighten its monetary stance or limit TRY liquidity may also help TRY to strengthen, thereby undermining the trade. Periods of EM-favorable risk sentiment may also help TRY to appreciate.

Efforts to bolster democracy and restore investor confidence may undermine the recommended the position.

We do not believe TRY would trade back below 2.75 levels on the lower side. The inflation differentials alone would take fair value to well towards 2.90 and above. Moreover, the persistent support from the EU on the refugee crisis may wane given Erdogan’s support for groups fighting Kurds across the border. We, therefore, project USD/TRY to settle at about 3.10 by end Q4’ 2016. 

We had been constantly advocating the hedging device since June 22nd in order to keep UNSDTRY’s upside risks in check and we’re still firm on that call on hedging grounds

We recommend an ATM call as a hedging vehicle to stay long in USDTRY, the underlying spot fx is currently trading at 3.0457. Our trade horizon is 1-2 months. We target an 8% move higher in USDTRY to 3.2888, and place a stop loss at 2.9234. The position costs 70bp in carry per month.