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FxWirePro: Cyclical effects of crude oil on Turkish lira – USD/TRY OTC updates and options strategy

On the losing side of the oil price rally is Turkey: the country not only loses from a higher energy import bill, but it also loses doubly because the oil price is an important external driver of inflation. 

While the central bank confidently proclaims that inflation will trend steadily down beginning H2, renewed lira weakness is already making a dent in this story – the latest CBT survey highlighted a 0.6pp rise in year-end inflation expectation. 

Inflation had hardly fallen much below 20% during the best months of lira performance, and it should not be difficult to believe that inflation could once again accelerate to above 20% if the oil price was to rise or if the lira were to depreciate further. 

Hence, the sanctions development is negative for the lira. 

USDTRY has resumed its bullish streaks with the current price at 5.8866 levels, the major uptrend of this pair bounce back at 9EMA support after 3-black crow pattern as you could observe above technical chart.

Most noticeably, the Turkish lira experienced volatility again late last week: in the recent past, the exchange rate rallied sharply in a move reminiscent of days when policymakers had intervened in the London swap market by reducing lira supply.

Trade tips: 3m USDTRY debit call spreads are advocated with a view to arresting upside risks. Initiate 3m 5.4785/6.54 call spreads at net debit. Thereby, one achieves hedging objective as the deep in the money call option with a very strong delta will move in tandem with the underlying spikes.

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 well-positioned for downside risks on the above fundamental factors. Positively skewed IVs signify bullish risks of USDTRY.

IVs of this underlying pair is on the higher side, trending highest among the G20 FX space. Call options of USDTRY with a higher IVs cost more, because, increasing IV is desirable for the holder of the option, just for an intuition that the higher likelihood of the market ‘swinging’ in holder’s favor. Please also be noted short-dated options are less sensitive to IV, while long-dated is more sensitive. Courtesy: Sentry, Commerzbank & Tradingview.com

Currency Strength Index: FxWirePro's hourly USD spot index is flashing 118 (which is highly bullish), at press time 13:42 GMT). 

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

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