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FxWirePro: Crude Oil’s Stimulus Turkish Lira And Russian Ruble Sluggish – Debit Call Spread Functions As Desired

The crude oil price tanked yesterday, with brent reaching almost the $20/bbl mark amidst fresh risk-off sentiments which drove most EM currencies weaker against the dollar. The broad-based weakening of emerging market currencies in the recent weeks may sometimes make it difficult to observe any fundamental patterns. 

Nevertheless, certain currencies have performed relatively well – for instance, the Turkish lira. As expected in our previous post, the lira may appear weak at an absolute level, with USDTRY reaching 6.60 yesterday, while the USDRUB level of just below 80.00 may not attract that much attention because the rouble has been here before in past weeks when the oil price got battered.

However, studying the performance of each currency relative to its weighted peer basket shows a more systematic picture. Charts 1 and 2 show the trends in RUB and TRY since the beginning of the year when compared to its peer group (comprised of BRIC countries and South Africa): we find that the rouble has noticeably underperformed its peer group in recent days, while the lira has outperformed. This matches the expected behaviour when the oil price is falling – the rouble is the big loser while the lira is a key beneficiary. This relative performance is likely to extend if the oil price were to fall further in the near-term; but over the coming quarters, we forecast the oil price to bottom-out and recover to $40-50/bbl levels, which would help the rouble relative to the lira. In any case, we forecast both currencies to recover some ground against the US dollar by Q3 as we move past the worst of the crisis news.

Hedging Strategy: 

On hedging grounds, capitalizing on prevailing price dips and above driving forces, we already advocated 2m USDTRY debit call spreads with a view to arresting momentary downside risks and upside risks in the major trend. At spot reference: 6.56 level, initiated 2m 6.25/6.96 call spreads at net debit. 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. 

It seems that hedgers of TRY are positioned for the upside risks on the above fundamental factors. The skewness 3m IVs are indicating upside risks, higher bids for OTM calls are hedging bias towards upside risks (refer above nutshell). 

IVs of this underlying pair is also on the higher side, trending highest among the G20 FX space. Call options with a higher IVs cost more, because, increasing IV is conducive for the option holder, just for an intuition that the higher likelihood of the market ‘swinging’ in holder’s favour. Courtesy: Sentry, Bloomberg & Commerzbank

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