In Turkey, the inflation in February is expected to accelerate to 9.8% YoY terms, it is scheduled to be printed on Thursday.
Inflation expectations remain de-anchored as a result of the CBT's reactive policy stance and skepticism about the inflation-targeting framework.
The most recent CBT expectation survey also revealed deteriorating medium-term inflation expectations (24-month forward inflation is now 7.3% YoY, above the 5% target).
We believe that a combination of a Fed hike and short term international claims at over three times FX reserves may push local corporates to buy USD/TRY.
Hedging Perspectives: (USD/TRY)
Since we continue to foresee USD/TRY to trade above 3.25 in the coming months. The main drivers will likely be disregard of the inflation targeting regime and high levels of foreign liabilities.
Long USD/TRY 6M ATM vol vs. short 1Y 25D USD calls/TRY puts, 150:100 vega ratio (delta-hedged): Turkey's macro vulnerabilities are fairly projected, a bulky Turkish current account deficit, too much dependence on overseas portfolio financing, 7%+ inflation.
The short risk-reversal bent can potentially hurt in a vol spike, and we are cognizant of the fact that 2Y forward points typically out-deliver 1Y in stress, but even accounting for those factors.
The box spread has historically delivered a superior return profile vis-a-vis outright 1Y vol - less attenuated P/L spikes but greater retentivity through a broad vol uptrend over the past 12-18 months.
