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With USDTRY punching through the 4.40 level yesterday but for today the failure swings are observed, as a result, shooting star candle pattern is most likely. Moving forward, we are one step closer to CBT having to use an emergency rate hike to stabilize the currency. This has been the base-case, the trigger behind the latest surge is Turkish President Erdogan's confirmation during London interviews this week that he wants to play a more pro-active role in monetary policy once he has become executive president.
The CBRT is buying time with technical measures which are likely to prove ineffective. Two technical adjustments were introduced in the past week: 1) increased lira settled NDF auctions, and 2) lowering the reserve option mechanism upper limit to release USD liquidity. These measures are inadequate and can only pause the price action, in our view. 100bps of the hike was forecasted at the June meeting but market forces may compel the CBRT to act earlier in an emergency meeting. Ultimately, CBRT needs to impose a significantly higher real rate premium, in our view.
Against all above-stated background, repeating that "the central bank is independent" loses its meaning. Had it been a routine week back in Ankara, Erdogan may not have explicitly stated his views given the background of a lira storm – but, he probably could not avoid it during these especially broadcast high-profile interviews.
He took some time to bring up his notes and give out comparisons that countries such as the US and UK have negative real interest rates and still have lower inflation and are more competitive internationally; that is what Turkey must do. International investors are unlikely to be convinced: while one may hold a neo-Fisherian view of inflation, the statistics cited refer to various stages of disequilibria which individual countries are in since the Lehman crisis – and more importantly, investors want assurance about respect for process and domain expertise more than they want an answer about exactly where rates will go. Watch out for an emergency rate hike.
Overall, the tendency for inflation would be to peak and moderate – but only slightly, say to around 9% in the coming months. This extent of moderation will not neutralize Turkey’s long-term inflation, though – at the best, it can bring near-term relief. In the medium-term term, for the stabilized lira, we, therefore, expect USDTRY to head up towards the 4.00 mark.
Trading tips:
Short 2m ATM calls, Sell 1Yx1Y USDTRY FVA vs buy 1Y ITM call.
Buy USDTRY call (4.00) and EURTRY call (4.83) (equal weighted USD notional).
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