FxWirePro: Uphold USD/TRY RV trades on prolonged Turkish lira’s triumph owing to US relaxation of sanctions

The Turkish lira continued its rally today amidst the broader EM rally after the US removed sanctions which had frozen the assets of Turkish interior and justice ministers; and Turkey reciprocated by removing counter-sanctions on two US ministers. 

In our view, however, such easing of sanctions should have been fully anticipated after pastor Brunson was released – it is difficult to see what is new information here; whatever sanction has not yet been lifted, for example the steel tariff, will also be lifted soon – when that happens, it should not come as a surprise to anyone. 

While the Turkish consumer price inflation increased to 25.24 pct YoY in October of 2018 from a 24.52 pct in the prior month, and beating market expectations of 24.5 pct. It was the highest inflation rate since July 2003, as both food and housing prices increased faster while transport prices continued to rise amid a falling lira.

Higher inflation had actually eroded all real policy rate premium. CBRT surprised all market expectations by hiking rates by 625bps at its last policy meeting on September 13. 

However, the subsequent CPI release showed headline inflation soaring 6.30 pct MoM in September, eroding fully the real rate premium imposed by the central bank. The monthly inflation gain was more than twice higher than consensus expectations with 3m/3m momentum measures of core inflation now around 50 pct. 


All these indicators reiterate our recent message: by not raising rates last month, CBT accepted a zero real-interest rate for the months ahead, and by doing so, chose to fall behind the curve.

Trade tip: At spot reference: 5.4427 levels, contemplating above driving factors, on hedging grounds we would like to uphold RV trades - 3m USDTRY put up-and-in Short 1m put. Courtesy: Commerzbank

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards 51 levels (which is bullish), while articulating (at 14:10 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex