(Stopped Out) SHORT EUR/TRY @ 3.91 FOR NEXT THREE TO SIX MONTHS

After a year of significant depreciation around 20% against Euro, we think Turkish Lira is stabilizing at least in the medium term and will start appreciating against Euro soon.

Market Conditions: 

  • The EUR/TRY has completed a topping wedge and is expected to break the technically significant level at ₺3.88 soon.

EURTRY.JPG

  • In addition, Turkish Lira against dollar has already broken the technically significant level at ₺3.61.

USDTRY

  • It indicates that the Turkish Lira is likely going to appreciate against both dollar and Euro. We pick the EUR/TRY pair instead of USD/TRY pair as to avoid the risks coming from a sudden strengthening of dollar should Le Pen wins the French election. The market is pricing in a most likely win from Macron, however we think that is far from being certain.

Sentiment & Expectations

  • Turkish economy is rated as one of the most miserable economies in the world and its misery index has reached a multi-year high at around 23. The markets have been extremely bearish on Turkish lira.

Turkish Misery Index

Fundamentals

  • Turkish GDP has recovered in the fourth quarter of 2016 from a negative fourth quarter in 2016, the first negative one since the 2008 financial crisis.

Turkish GDP

  • The inflation in Turkey has spiked towards almost 11.29% in March 2017. We expect the Central Bank of Turkey to continue to hike interest rates to curb inflation in the upcoming monetary policy meetings.

Turkish Inflation Rate

Events: 

  • Erdogan expanded his power quite significantly by winning/manipulating the referendum. In the short to medium term, this is beneficial to the economy, as the country has been suffering from political instability, terrorist attacks and protests.
  • The second round of French election might affect Euro quite significantly. If Le Pen wins, then Euro might weaken significantly as the market has not quite priced in such risks that there might be a Frexit.

Reasons to be Wrong:

  • If the ECB is more hawkish than expected, then Euro might strengthen further from the current spot to stop out the trade.
  • If the Central Bank of Turkey lowers the interest rates to stimulate the economy instead of hiking the interest rate.
  • If Euro rallies more than expected upon Macron’s success over second round of French election.

Conclusions:

we spot a potential negative confirming self-reinforcing trend brewing and we are here to initiate a bearish note on EUR/TRY.

Current Price: ₺3.9139, Target: ₺3.42, Stop: ₺4.00.

Term: three to six months, Reward to risk: 5:1.

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