FxWirePro: A Run Through on Turkish Macros, IV Skews and Options Trade Tips

Turkey’s trade data for January confirmed that the deficit which had narrowed considerably following the lira crisis last year has begun to widen out again. It is early days still, and this could turn out to be noise, but the development deserves attention as imports are beginning to outpace exports once more and the trade deficit has begun to re-widen (refer above chart). 

It has more than doubled from its low of October 2018 and we should watch out for how it responds as policymakers try to boost the economy using monetary easing. 

The benchmark rate is not being cut and we do not expect CBT to cut rates next week either but broader conditions are being eased via RRR cuts and easing of lending norms. If these do not work, then fiscal stimulus is likely to be increased. The point is that the government is unlikely to simply accept low GDP growth. As it provides more stimulus, the economic re-balancing which occurred last year will partly reverse. 

We see the risk that the market has been over-optimistic about how many long-term structural problems in Turkey were solved by last year’s crisis. And disappointment in this regard, going forward, will have obvious lira implications.

Trade tips (USDTRY): At spot reference: 5.3590 levels, contemplating above macroeconomic fundamentals, we advocate initiating longs in 3M USDTRY at the money -0.49 delta put, and go long in at the money +0.51 delta call of similar expiry and simultaneously, short 2w (1%) out of the money puts. Thereby, we favor slightly on upside risks and short leg likely to reduce the cost of the strategy.

The rationale for the trading: Please observe that the above technical chart is also clearly indicating the further upside risks. 

It seems that hedgers of TRY are also in line with the above fundamental factors. As you could observe the above nutshell, IV skews of USDTRY have extended on either side that indicates both the upside and downside risks as the hedgers’ interests for both OTM calls and OTM puts. 

IVs of this underlying pair is on the higher side, trending highest among the G20 FX space. Courtesy: Sentrix & Commerzbank

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards -51 levels (which is bearish) while articulating (at 11:38 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex