Vulnerabilities offset recent cheapening of TRY

Breakevens have widened more than 100bp even though real rates have risen alongside TRY move. Moreover, CBT may choose to tolerate TRY weakness in line with broader EM FX moves, rather than being proactive. 

Despite TRY's 16% YTD depreciation, further depreciation lies ahead. There are several reasons for such a possible policy stance, policy uncertainty (weaker sponsorship of CBT Governor Basci post-Babacan, uncertainty regarding elections) and the fragile growth outlook. 

"Moreover, Turkey's large external financing needs will likely continue to leave TRY exposed to repricing of general EM risk. It is recently recommended getting long USDTRY through a 1x2 call spread", says Barclays.