FxWirePro: Delta calls for USD/TRY hedging on hawkish CBRT’s revised inflationary forecasts

In its latest Inflation Report, CBRT did the obvious and revised up its year-end inflation forecast from 7% to 7.9%. But, this compares with market expectations in the 9% range. CBRT also revised up its end-2019 inflation forecast from 6% to 6.5% - most observers would find this latter target wildly optimistic given the track record. CBRT attributes much of the upward revision to higher oil and commodity prices and not an inherent tendency to overshoot. Another day, another inflation report – same message that inflation will drop to 5% over the medium-term under the current monetary policy.

Locals are currently not in a position to support lira with FX selling, in our view. Individuals are still rebuilding their FX holdings after the large drawdown in September/October, while corporates are increasingly their FX buffers on trend.

Finally, the central bank financed $13bn of FX needs via FX reserves between mid-November and the end of the year; however, such a pace of FX reserve usage may spook markets if it were to continue (also the central bank goal is to increase FX reserves).

As such the 50bps hike, which still keeps real policy rate negative vs. headline inflation at 13% yoy, is clearly insufficient. It is projected that the further sharp FX weakness to force the central bank into a more credible tightening. While we maintain longs for an outright USDTRY ATM +0.51 delta call (spot reference: 3.7525) of 3m tenors.

You hold this derivative contract on both hedging as well as trading grounds, please observe payoff structure that flies exponentially as the underlying spot FX keeps spiking northwards.