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Escalating diplomatic tensions. Following the diplomatic row between the US and Turkey, we entered a short lira position.
To mitigate negative carry, the preferred structure is also short in TRYRUB.
Go short TRY on following risk dynamics:
1) Diplomatic ties are under increasing strain
2) The real yields have substantially diminished
3) The positive effects of credit stimulus programmes from earlier this year may wane
4) The risk of early elections has increased
5) The central bank’s credibility may come under pressure
6) Turkish residents have resumed accumulating foreign currencies. Beware the tail risk.
Under these circumstances, it is not inconceivable that USDTRY could rise another 20%+ over a short period of time (similar to the 30% move in 4Q last year), especially if EM sentiment sours alongside a continued grind higher in core rates or if geopolitical tensions escalate further.
CBRT monetary policy will likely remain cautious as the inflation dynamic is proving worse than expected. September data brought no respite from inflation concerns. Headline inflation rose to 11.2% YoY from 10.68% YoY in August. Core inflation was also higher at 10.98%yoy from 10.2% YoY in August, thus, sell 1Yx1Y USDTRY FVA vs buy 1Y ATM call.
