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We maintain our bullish position in TRY but vols have been jerky, now partially diversified with OW RUB. CBRT monetary policy will likely remain cautious as central bank concerns over ‘sticky’ inflation expectations grow, supporting lira strength. We are likely past the peak of inflation in Turkey, yet the CBRT has maintained a hawkish stance given concerns over inflation expectations.
The Turkish inflation situation is hardly improving. CPI inflation data for August disappointed yesterday: in our estimate, headline CPI rose by 1.1%m/m after seasonal adjustment; and the widely watched core inflation rate reached double-digit (10.2%y/y). What is interesting, this occurred despite the lira having remained stable and monetary policy having remained tight.
That raises an alert that structurally high inflation expectations could be proving a major factor. There are some relieving developments, however: the impact of imported commodity price pass-through is fading because of the stable lira.
If we were to hold both the commodity prices and the lira unchanged from here, the pass-through effect would disappear by the end of the year. That said, the outlook is cloudy: commodity pass-through has already reduced sharply over the past quarter – yet, wage hikes and domestic price pressure are making up for that.
What this means is that CBT will have very little wiggle room in coming months to relax its monetary stance, political pressure or not. The real interest rate has been positive this year and this has protected the lira to some extent, but higher inflation is already pulling the real interest rate down. This makes for a risky scenario in the event that major central banks tighten their policy stance via tapering or hiking rates.
Options strategy:
For those whose foresee non-directional or no dramatic moves on either side and prefer to remain in the safe zone, we recommend shorting a straddle considering flat IVs or shrinkage.
Thereby, one can benefit from certain returns by shorting both calls and puts.
Thus, short 7D (1% OTM striking) put and (1% OTM striking) call simultaneously of the same expiry (preferably short term for maturity is desired and ensure options greeks as shown in the diagram). Maximum returns for the short straddle is achieved when the USDTRY price on expiry is trading at or near spot levels only as both the instruments have to wipe off worthless. So that the options trader gets to keep the entire initial credit taken as profit.
