20171113-法国巴黎银行-Turkey_Breaking_bad_8页_465kb

EM Strategy Desknote Summary

Core Content

This document is a strategy desknote from BNP Paribas London Branch, focusing on the Turkish Lira (TRY) and its recent performance in the foreign exchange market. It is authored by Piotr Chwiejczak and Sai Ulluri, both FX & IR CEEMEA Strategists, alongside H. Erkin Isik, CFA from Turk Ekonomi Bank A.S. The report outlines the current state of the TRY, the factors influencing its depreciation, and the recommended trading strategies based on the analysis of the cross-currency (CCY) curve and forward rate agreements (FRAs).

Main Views

• TRY Depreciation and Recent Pause:

  • The TRY ended the week below its previous close, breaking a trend of consecutive weekly declines.
  • However, the report suggests this pause is temporary and not a reversal of the downward trend.
  • The rise in the TRY's forward premium is attributed to the steepening of the front end of the CCY curve, which has slowed the depreciation momentum.

• Carry and Stop-Loss Risks:

  • If the CBRT does not hike interest rates, the negative roll-down cost will become unsustainable, potentially triggering another wave of stop losses.
  • Investors are currently paying a negative carry of 30bp per month to maintain the TRY's premium.
  • The report recommends receiving 3x6 CCY FRA at 13.52%, targeting 13.00% with a stop-loss at 13.70%.
  • It also suggests being long USDTRY, as the risk of curve flattening remains.

• Historical Context and Structural Issues:

  • The report draws parallels to the 2016-2017 period, when a similar drawdown led to a one-touch barrier level increase.
  • It emphasizes that the TRY's depreciation is driven by structural issues, not just speculative flows.
  • Turkey's reliance on external financing and low domestic savings have made the currency vulnerable.
  • A 4% weekly return is needed to break the current drawdown and restore confidence in the TRY.

• Market Outlook:

  • The CBRT is expected to remain passive and only raise rates when the TRY weakens significantly.
  • The current rise in the TRY's premium is temporary and does not indicate a long-term stabilization.

Key Information

• Current TRY Performance:

  • The TRY ended the week below its previous close, ending a trend of consecutive declines.
  • The 3x6 CCY FRA yield increased from 12.25% to 13.52%, indicating a steepening of the front end of the CCY curve.

• Forward Premium and Carry:

  • The steepening of the CCY curve has raised the forward premium, which has slowed the TRY's depreciation.
  • The current carry is negative, and investors are paying 30bp per month to maintain their positions.
  • If the CBRT does not hike rates, the premium may fall back, leading to renewed TRY depreciation.

• One-Touch Options and Risk:

  • One-touch options are pricing in USDTRY at 4.50 with a 25% probability of reaching this level within six months.
  • The report warns that the TRY's current position is fragile and that a large positive return is needed to break the negative feedback loop.

• Inflation and Credibility:

  • Inflation breakevens remain well above the CBRT's target, suggesting a loss of credibility in its anti-inflation stance.
  • The 2y breakeven rate is at 11%, indicating persistent inflationary pressures.

• Trading Recommendations:

  • Receive 3x6 CCY FRA at 13.52%, targeting 13.00% with a stop-loss at 13.70%.
  • Maintain a long USDTRY position, as the currency's depreciation may resume if the curve flattens.

Charts Mentioned

• Chart 1: Front-end CCY rates, particularly around the 3-month point, have risen over the past two weeks.
• Chart 2: FRA gaps show that carry/roll-down is positive on receiver positions at the 3-month point of the curve.
• Chart 3: USDTRY forward curve in Dec-16 vs. Jan-17 with a 25% one-touch upside barrier in Dec-16.
• Chart 4: USDTRY forward curve now with a 25% one-touch upside barrier.

Legal and Distribution Notes

• The document is a marketing communication and not investment research.
• It is intended for Professional Clients and Eligible Counterparties under MiFID.
• BNP Paribas may have financial interests in the securities or issuers discussed.
• The document contains performance data based on back-testing and is not guaranteed to reflect actual market outcomes.
• It is subject to change and may not be reproduced or distributed without prior consent.
• Legal disclaimers apply regarding the use of the document, including no liability for losses or inaccuracies.

Contacts

• Piotr Chwiejczak: FX & IR CEEMEA Strategist, BNP Paribas London Branch
• Sai Ulluri: FX & IR CEEMEA Strategist, BNP Paribas London Branch
• H. Erkin Isik, CFA: FX & IR CEEMEA Strategist, Turk Ekonomi Bank A.S.

Disclaimer

• This document is not investment advice and does not constitute a prospectus or public offering.
• It is for informational purposes only and may be subject to conflicts of interest.
• No assurance is given that any indicated returns or performance will be achieved.
• Past performance is not indicative of future results.
• The information is believed reliable but not guaranteed.