FxWirePro: USD/ZAR remains weak, eyes 23.6%fib support 
FxWirePro- Major Pair levels and bias summary 
FxWirePro: NZD/USD neutral in the near-term, scope for downward resumption 
FxWirePro: USD/JPY holds narrow range,focus on near-term support 
FxWirePro: USD/JPY caught in narrow range, bias bearish 
FxWirePro- Major Pair levels and bias summary 
FxWirePro: GBP/USD drifts lower as greenback firms 
FxWirePro: EUR/NZD steadies above 2.0400, retains bid tone 
EURJPY Holiday Lull: Tight Range Above 183 Keeps Bullish Bias Alive – Buy Dips Targeting 186-187 
NZDJPY Breaks Lower: Bearish Bias Strengthens as Trendline Support Crumbles 
FxWirePro: GBP/NZD retreats slightly but trend is still bullish 
FxWirePro: USD/CAD trends higher, but faces potential pitfalls 
GBPJPY Coiled in Tight Range: Bullish Bias Holds Above 210 – Buy Dips Targeting 212 Breakout 
GBP/JPY Bounces Off 210 Support: Bullish Bias Intact – Buy Dips Targeting 212 
FxWirePro: GBP/AUD neutral in the near-term, scope for downward resumption 
FxWirePro:AUD/USD attracts selling interest, could be on verge of a bigger drop 
Central Bank of Turkey will likely tolerate a weaker FX market pricing for rate hikes is aggressive, in our view, given the indications of weak economic growth and the rising vulnerability of the CBT to political pressures. The central bank will likely keep policy rates stable and use liquidity measures to prevent excessive TRY depreciation (out of line with other EMs). External borrowings will have to be rolled in domestic markets, putting further pressure on the exchange rate. We recommend being long a 3m USDTRY 1x2 call spread.
We recommend being long USDTRY through a 3M 1x2 call spread, with strikes at ATMF and 3.35. The option costs 0.69% (spot ref: 3.0658), with significant savings relative to the vanilla ATMF call (which costs 3.5%). The 1x2 call spread effectively expresses our view that moderate USDTRY upside is likely, given the fundamental outlook; however, sharper moves would invite a more aggressive monetary policy response.
Why call spreads - the key fundamental driving forces:
- The recent increase in TRY real interest rates and sharp currency sell-off should not be faded. First, while TRY real interest rates have kept pace with the currency move, breakevens have widened more than 100 bps and explain almost all of the increase in long-term interest rates.
- Second, the c.9% depreciation of the TRY versus the USD since mid-August has happened alongside broad-based weakness in EM FX. However, the TRY does not look exceedingly cheap from a medium-term perspective.
- Although the CBT is likely to keep domestic liquidity conditions tight, we think it will likely tolerate TRY weakness at the expense of hiking rates, considering the fragile growth outlook and increasing vulnerability of the CBT to political pressures post-Babacan.
- Fourth, there seems little potential for the CBT to surprise the markets, given that spot short-term interest rates are above the forwards.
- Finally, we reckon the simplification of monetary policy is a red herring at this stage and actual moves may have to wait until after Fed normalization.
