FxWirePro: Turkish lira still appears vulnerable on political turmoil – Uptrend and IVs appeal USD/TRY debit call spreads

EM FX vols have generally continued the steady decline following the sharp repricing higher as occurred last August, with the JPM VXY EM Index roughly just 2 vol points higher than the summer-2014 all-time low recorded by the index. Compared to G10, at least one episode has caught markets attention this year in terms of a spike of vol levels, USDTRY (refer 1stchart).

The electoral body’s decision to annul the election result for Istanbul 31st Marchrch caused heavy losses for the Turkish lira yesterday (refer 2ndchart). Even in the run-up to the decision concerns about continued political uncertainty and possible unrest had weakened the lira and pushed USDTRY above the level of 6.

There is a lot to suggest that it will remain there for now, as it has become even less likely that effective measures to stabilize the economy will be implemented any time soon (the re-run is planned for 23rdJune).

In particular, anyone who had hoped for the Turkish central bank despite contradictory signals is likely to have finally abandoned hope now. That means things will remain uncomfortable to TRY.

USDTRY has resumed its bullish streaks with the current price at 5.6909 levels, the major uptrend of this pair bounce back at 9EMA support after 3-black crow pattern (refer 3rdchart).

Most noticeably, the Turkish lira experienced volatility again late last week: on Thursday 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 5.30/6.54 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-balanced on either side with the above fundamental factors. 

IVs of this underlying pair is on the higher side, trending highest among the G20 FX space. Call options 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: Commerzbank & Tradingview.com

Currency Strength Index: FxWirePro's hourly USD spot index is flashing 74 (which is bullish), at press time 13:02 GMT). 

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