FxWirePro: Turkish lira gives up recent gains to dollar - USD/TRY bounces back, EUR/TRY hits all-time highs – Unearth right drivers and hedge price risks

USDTRY bounced back from the lows of 3.5107 levels. But as you could observe, the trend has remained in a range from the last couple of weeks.

Looking at USD/CEEMEA FX, we still see good chances of at least launching broader counter trend rallies to internal 76.4 % retracements at 3.8317 in USDTRY.

Elsewhere, yesterday EURTRY surged to the new all-time highs and is inching towards the 4.20 mark. It doesn’t seem to be the difficult news from Turkey that is driving prices. A large share of the recent move is also due to the recent euro strength.

On the flip side, the depreciation would have been even sturdier if the prevailing market gush wasn’t particularly EM friendly. This is reflecting the fact that the market no longer believes in rapid Fed rate hikes.

That does not mean that all is well for the lira. Even if the official data does not show any net negative effect as a result of the coup and the subsequent wave of arrests (and let’s not discuss our view of the Turkish data at this juncture) sentiment amongst international investors has deteriorated as far as Turkey is concerned.

However, the country depends on large volumes of capital inflow to finance its current account deficit, should the capital inflow come to a stopping pressure on the lira would rise. Against this background, today’s data on consumer prices are unlikely to create optimism. With a little luck inflation might ease below 10%, but overall the inflation outlook is rather poor.

First of all, it is questionable whether the central bank would have the determination to raise interest rates to get inflation under control should this become necessary. And secondly, the effects of the weaker lira will only become clear over the coming months. Commerzbank reckons that a rise in inflation in the absence of higher key rates would be disastrous for TRY.

Options strategy:

For those whose foresee non-directional or no dramatic moves on either side and prefer to remain in the safe zone, we recommend shorting a straddle considering flat IVs or shrinkage.

Thereby, one can benefit from certain returns by shorting both calls and puts.

Thus, short 7D (1% OTM striking) put and (1% OTM striking) call simultaneously of the same expiry (preferably, short term for maturity is desired and ensure options Greeks as shown in the diagram).

Maximum returns for the short straddle is achieved when the USDTRY price on expiry is trading at or near spot levels only as both the instruments have to wipe off worthless. So that the options trader gets to keep the entire initial credit taken as profit.