Following on from the above explanation on EM FX, we note here that CBT is likely to be pushed into a corner by the widening interest rate differential.

It is one of the only remaining central banks around EM which is viewed by market participants as unable to hike rates because of political pressure.

Unless markets calm down soon, USDTRY could continue to spike, and this will trigger another negative spiral between exchange rate and inflation.

CBT will delay tightening policy and will attempt to calm things down by tweaking FX liquidity measures, which will likely not work.

Please be noted that the ATM IVs of 1m and 2w are spiking on higher sides at 17.12% and 16.43% respectively, against a backdrop of a widening current account, ongoing political risks, and rising oil prices, we remain UW TRY in the GBI-EM Model Portfolio and hold USDTRY 1x1 call spreads (3.5050, 3.70), spot ref: 3.5026.

The only positives for lira here, in our view, are extended short speculative lira FX positioning, which likely remains in place even following the short squeeze earlier this week.

Additionally, we understand the government is encouraging state institutions to convert FX holdings into lira. Both of these sources of support are likely to prove limited and can only slow rather than reverse the lira slide, in our view.

Acknowledging the positioning, we continue to hold 1x1 call spreads (taking profits on outright calls on November 20), however following the government’s package there is now a larger risk of a more aggressive sell-off. Continued non-resident outflows from the local bond market are also likely to drive further TRY weakness.

In outright trades, we hold:

Long 20-Jan-17 USDTRY 1x1 call spread (3.45, 3.60), spot ref: 3.3610.

Long USDPLN at spot reference 4.22 and add long EURPLN via 1x1 call spread (4.45, 4.60), spot ref: 4.4090.

Short 6m1y USDZAR FVA (30k vega).

Short 27-Nov-17 EURCZK forward.