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The Central Bank of Turkey (CBT) maintained status quo during its June meeting, kept benchmark one-week repo at 8.25 percent surprising markets that had forecast of a 25 bps rate cut, saying that pandemic-related rise in unit costs have led to some increase in the trends of core inflation indicators despite the restraining effects of aggregate demand conditions.
Given Turkey’s double-digit (and accelerating) inflation rate, the 8.25% policy rate is anyway too low. Had CBT signalled strongly that rates would be cut no further, that would qualify as a positive signal – but even then, the market would have been sceptical that such guidance could stand up to President Tayyip Erdogan’s inevitable criticism.
CBT’s reference to inflation moderating in H2 means that we have yet not reached the end of the easing cycle. This is why the lira reversed its rally. The size of rate cut on any given day does not matter much, unless the move signals something different about the rate path in the medium-term. In this case, it does not. The market will now watch for critical remarks from the president; and even if these did not come, the market will soon debate the timing of the next rate cut. USDTRY has been drifting in sideways and develops range-bounded trend, this hardly makes for a supportive lira backdrop. The projections for USDTRY is likely to surpass the 7.00 mark in the months to come.
Options Strategy:
Capitalizing on prevailing range bounded trend and other fundamental factors, we already advocated 2m USDTRY debit call spreads with a view to arresting momentary sideway or downtrend and upside risks in the major trend. When the underlying was trading at 6.7940 level, initiated 2m 6.25/7.20 call spreads at net debit. The current spot reference: 6.88550 levels, we now wish to uphold the same positions as the strategy has been functioning as desired so far. One can achieve hedging objective as the deep in the money call option with a very strong delta will move in tandem with the underlying spikes. Courtesy: Commerzbank
