Current:
TRY/USD: 34.9634
Variation:
Yearly 18.61% Monthly 1.47%
Expected Return:
Q1 0.12% Q4 0.57%
The Turkish lira is trading at approximately 34.5 per USD, remaining close to its record low as traders closely monitor the country's evolving economic policies after a transition towards more conventional measures. In November, the central bank maintained its key interest rate at 50% for the eighth consecutive meeting, while rorts indicate that inflation decreased to 48.58% in October from 49.38% in Stember. Despite this easing, inflation levels exceeded market expectations for both Stember and October, leading investors to anticipate that any potential rate cuts by the bank could be postponed until next year.
Earlier this month, the central bank revised its inflation forecasts, raising expectations to 44% from 38% for the end of 2024, and to 21% from 14% by the end of 2025. In a notable market reaction, rorts have emerged suggesting that some traders are beginning to unwind carry trades following interventions by state banks aimed at selling dollars at lower lira valuations.
As of Friday, December 13, the USDTRY exchange rate increased by 0.0933 or 0.27% to 34.9634, up from 34.8701 in the previous trading session. Analysts expect the Turkish Lira to reach 35.01 by the end of this quarter, with a projection to trade at 35.16 in twelve months.
Investment Strategy for TRY/USD:
1. Long Term Position:
Given the expected slight increase in the value of the USD against the TRY over the next year (from 34.96 to 35.16), and the historically high yearly variation of 18.61%, a cautious long-term strategy would be to hold a small long position in USD/TRY. This aligns with anticipated gradual depreciation of the Turkish Lira, supported by ongoing economic policy adjustments and high inflation rates.
2. Short Term Position:
For the short-term, considering the expected minimal price increase in the next quarter (from 34.96 to 35.01) and the moderate monthly variation of 1.47%, a neutral strategy such as a covered call might be appropriate. Investors could purchase USD/TRY and sell call options at the expected quarter-end price of around 35.01 to generate premium income, effectively reducing potential losses if the position does not appreciate significantly.
3. Hedging with Options:
In light of potential central bank interventions and the evolving economic landscape, hedging with options could mitigate risks. Buying put options on USD/TRY can protect against unexpected lira appreciation or policy shifts that may cause the TRY to gain against the USD.
4. Monitor Macro-Economic Indicators:
Remain vigilant about macroeconomic indicators such as central bank interest rates, inflation updates, and policy changes. Any significant deviation from the expected inflation rate or rate decisions could necessitate swift adjustments to the strategy, including unwinding positions or altering hedging tactics.
This strategy balances potential long-term gains with caution against short-term volatility and economic uncertainty, utilizing both direct currency positions and derivatives for protection and income generation.