20180319-法国巴黎银行-EM_Strategy_Desknote_10页_466kb

Summary of EM Strategy Desknote: Turkey - Too Steep to Be True

Core Content

This desknote provides an analysis of the Turkish Lira (TRY) depreciation and the implications for the cross-currency (CCY) curve, inflation expectations, and market strategies. The report is authored by BNP Paribas strategists and outlines the current state of the TRY and the likely policy responses from the Central Bank of the Republic of Turkey (CBRT).

Key Observations

• The TRY has been depreciating faster than forward rates predict, marking the sixth consecutive day of losses.
• One-week realised losses in TRY have exceeded 2%, the worst since July 2017, indicating a significant downward trend.
• The CCY curve has steepened, particularly around the 1-year point, with the 3m-12m TRY CCY rates differential widening to over 125bp.
• The steepening of the curve is a market reaction to uncertainty about the CBRT's policy response to FX weakness, typically pricing in a tightening cycle.

Strategy Recommendation

• Recommended Position: Own a 1m fwd 3m x 9m TRY CCY flattener at 95bp, targeting 50bp, with a stop loss at 115bp.
• Retained Position: USDTRY 3m call option to position for a possible "burst of dependence" and extended sell-off in the currency.

Market Dynamics and Feedback Loop

• The depreciation of the TRY has created a feedback loop: spot FX depreciation → forward FX depreciation → CCY curve steepening → potential slowdown in FX depreciation.
• The steepening of the CCY curve is expected to attract temporary flows that may slow depreciation, but this is likely to be short-lived.
• If the CBRT does not deliver on tightening expectations, the curve may flatten, leading to renewed FX depreciation.

Inflation Outlook

• Inflation expectations have worsened, with 24-month inflation expectations rising to 8.31% and 12-month expectations at 9.24%.
• These levels are well above the CBRT's inflation target of 5.0% and the upper bound of 7.0%.
• The recent depreciation of the TRY is expected to add 0.5pp to headline inflation, further exacerbating the inflation problem.

Carry Trade Positioning

• Offshore investors' carry trade positioning has reached a new peak, with cumulative inflows since 2017 reaching USD 32bn.
• Local banks have accumulated USD 8bn in FX deposits, but this is not sufficient to reverse the currency's weakness.
• The CBRT's FX forward auctions may not be effective in stemming the depreciation due to broader economic factors.

REER and Policy Response

• The real effective exchange rate (REER) has reached a low of 82.5, similar to levels seen in November 2017.
• The CBRT has historically responded to such levels with rate hikes and other measures.
• A further decline in REER may prompt the CBRT to take more aggressive policy actions, potentially including a rate hike at the 25 April MPC meeting.

Contacts

• Strategists:

  • Wike Groenenberg - Head of Emerging Markets Research, CEEMEA & APAC
  • Marcelo Carvalho - Head of Emerging Markets Research, Latam
  • Piotr Chwieczak - FX & IR CEEMEA Strategist
  • Sai Ulluri - FX & IR CEEMEA Strategist
  • H. Erkin Isik, CFA - FX & IR CEEMEA Strategist
  • Mirza Baig - Head of FX & IR Asia Strategy
  • Gabriel Gersztein - Head FX & IR Latam Strategy
  • Samuel Castro - FX & IR Latam Strategist
  • Gustavo Mendonca - FX & IR Latam Strategist

• Production Team:

  • Barbara Consuelo - London, BNP Paribas London branch
  • Amanda Grantham-Hill - London, BNP Paribas London branch
  • Anna McLaughlin - London, BNP Paribas London branch
  • Varghese Joseph - New York, BNP Paribas Securities Corp

Legal and Disclaimer Information

• This document is non-independent research and constitutes a marketing communication.
• It is not investment research and is not subject to any prohibition on dealing ahead of dissemination.
• The information is based on public sources and is not guaranteed to be accurate or complete.
• BNPP may have conflicts of interest and may engage in transactions inconsistent with the views expressed in this document.
• The document may include simulated performance data and is not intended as a guarantee of future results.
• No assurance is given that any transaction will be entered into on the terms indicated.
• The document is confidential and may not be copied or distributed without prior written consent.

Additional Information

• For more details, visit BNP Paribas Global Fixed Income Website: www.globalmarkets.bnpparibas.com

• For Bloomberg users:

  • Fixed Income Research BPFR
  • Emerging Markets Research BPFR
  • G10 Interest Rate Research BPBS
  • Market Economics BPEC

• Important Disclosures:

  • Options and ETFs discussed are subject to high risk and may not be suitable for all investors.
  • BNPP may have financial interests in the securities and may engage in transactions that could conflict with the views expressed.
  • All information is provided for informational purposes only and should not be relied upon as advice.