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EM STRATEGY | TURKEY DESKNOTE Summary

Core Content

This document provides an analysis of the Turkish financial market dynamics as of 13 October 2017, focusing on foreign exchange (FX) flows, local investor behavior, and the impact of offshore carry trade unwinding on the Turkish Lira (TRY). It also includes market data and legal disclaimers regarding the use of the report.

Main Points

• Offshore Carry Trade Unwinding: Offshore investors began reducing their carry trade positions even before the escalation of US-Turkey tensions in early October. This unwinding is reflected in the decline of local banks' off-balance sheet FX positions, which dropped by USD 4bn in the last three weeks to 6 October.

• Local Investor Behavior: Local investors have eased the pressure on the TRY by reducing their FX deposits by USD 4bn since mid-September, with USD 2bn of that reduction occurring in the last week. Despite this, local FX deposits remain USD 17bn above their January lows, indicating a potential continued trend of buying TRY as offshore carry trades unwind.

• Portfolio Flows: Offshore portfolio flows peaked at USD 34bn year-to-date in mid-September and declined to USD 30bn by 6 October. In contrast, local bond and equity portfolio inflows remained relatively flat at USD 15bn since mid-September.

• FX Market Data:

  • USDTRY spot rate is at 3.6515, with a daily change of -0.3% and a weekly change of +1.0%.
  • EURTRY spot rate is at 4.3281, with a daily change of -0.2% and a weekly change of +2.0%.
  • The BASKET (50% USDTRY + 50% EURTRY) is at 3.9894, with a daily change of -0.3% and a weekly change of +1.5%.
  • Forward implied and XCCY swap rates show minor fluctuations, with 1m USDTRY at 11.85, 3m at 11.95, and 6m at 12.09.
  • ATM volatility for USDTRY is at 12.28 for 1m, with a daily change of -0.25% and a weekly change of +1.96%.

• Bond Market Overview:

  • Local government bonds show a decline in yields, with the 2Y bond at 12.14%, 5Y at 11.52%, and 10Y at 11.27%.
  • Sovereign bonds include a 2Y bond with a price of 109.2 and yield of 3.26%, a 5Y bond with a price of 99.4 and yield of 4.92%, and a 10Y bond with a price of 88.6 and yield of 5.72%.
  • CPI linkers and corporate bonds also show similar trends, with yields decreasing slightly.
  • Government bonds yield curve indicates a stable trend in bond yields, with 2Y at 9.07%, 5Y at 8.45%, and 10Y at 8.30%.

• Volatility and Carry: The TRY offers one of the highest volatility-adjusted carries in the Emerging Markets (EM) space, which could benefit from a positive shift in global risk sentiment following US data announcements.

• Market Participants: The report includes contact details for various EM strategy contacts within BNP Paribas, highlighting the global presence and reach of the firm in the EM space.

Key Information

• Carry Trade Proxy: The change in off-balance sheet FX positions of local banks is used as a proxy for carry trade activity.
• Volatility Curve: The USDTRY ATM volatility curve shows a range of values, with 1m at 12.28% and 5Y at 11.03%.
• Legal Disclaimers: The document is non-independent research and is intended as a marketing communication. It does not constitute investment research and may be subject to conflicts of interest due to the firm's involvement in trading and market-making activities.
• Risk Considerations: The document warns about the risks associated with the products and investments discussed, including market, credit, and liquidity risks, and emphasizes that past performance is not indicative of future results.

Conclusion

The Turkish market is experiencing a shift as offshore investors unwind their carry trade positions, while local investors continue to support the TRY. The TRY's high carry value offers potential benefits if global risk sentiment improves. However, the currency remains vulnerable to local and global market conditions. The document serves as a market update and should be used for informational and discussion purposes only.