On Friday, October trade data confirmed that Turkey's deficit was widening once again. After seasonal adjustment, exports were flat in October versus September, while imports were up 1.7%m/m. As imports appear to be on the rise again, although not rapidly, while exports are flat – after shrinking until around mid-year, the gap between the two is widening again. The data strengthen our view that the Turkish current-account has narrowed over the past year mainly because the economy has been in recession; we should expect the deficit to widen again if the economy were to sustainably recover; conversely, if the deficit stays narrow, that would tell us that the economy is struggling to recover.
At present, the deficit is widening modestly because economic recovery is slow – nevertheless, the development is negative for the lira because there had been a lot of optimism that the current-account had been eliminated 'structurally'.
We remain pessimistic on the lira outlook and forecast USDTRY to (indicatively) reach 7.00 by the end of this year. Although major uptrend seems to be little edgy, bulls are hovering at 7EMAs after mild bounce-back (refer 1st chart).
It is a little surprising that EM FX vols have under-reacted so severely to the bearish global impulses that have been in train all year.
Trade tips: Capitalising prevailing price dips, we reckon that it is the ideal time for deploying longs with a better entry level, on hedging grounds 3m USDTRY debit call spreads are advocated with a view to arrest upside risks. Initiated 3m 5.50/6.24 call spreads at net debit. Thereby, one achieve hedging objective as the deep in the money call option with a very strong delta will move in tandem with the underlying spikes.
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 positioned for the upside risks on the above fundamental factors. The positively skewed IVs of 6m tenors are bidding for OTM calls strikes up to 6.48 levels (refer 2nd exhibit).
IVs of this underlying pair is also on the higher side, trending highest among the G20 FX space. Call options with a higher IVs cost more, because, increasing IV is conducive for the option holder, just for an intuition that the higher likelihood of the market ‘swinging’ in holder’s favour. Courtesy: Commerzbank & Sentrix