Turkish Lira Snaps Back With Snap Elections

…I decided to fade [USD/TRY] in anticipation of the next pullback. I also hope to collect a decent amount of carry as financial markets settle down a bit with earnings in the U.S.

Still, until the CBRT takes definitive action, it makes sense to short the lira in the middle of what looks like an extended uptrend; the trend needs to be steep enough to outpace the carry.

The above quote comes from last week when I outlined my strategy for trading the Turkish lira. I was fortunate I decided to focus on the fade of USD/TRY and did not try to get cute trying to short the lira ahead of what I felt was a very likely reversal for USD/TRY. I even grew my position as USD/TRY rallied and spiked one more time. So the sharp pullback came from a higher point than I expected and under much different circumstances than I anticipated.

USD/TRY careened back to its uptrending 20-day moving average (DMA).

The lira snapped back to life with news that Turkey's President Recep Tayyip Erdogan surprised markets with a call for a snap election on June 24th that significantly pulled forward the plan for November, 2019 elections. The strong reaction from the currency apparently represents an expectation that Erdogan is moving to arrest the rapid devaluation of the lira.

The Erdogan call for a snap election may have also just provided a catalyst for shorts to start closing out bets ahead of an April 25th monetary policy announcement from the Central Bank of the Republic of Turkey (CBRT). Bloomberg cited an analyst report demonstrating that the CBRT tends to take forceful action to protect the currency when its volatility reaches 1.4 times the volatility of emerging market peers. Although analysts are already expecting a small hike in rates next week, the volatility correlation suggests a move by the CBRT exceeding market expectations.

I plan to keep my short position on USD/TRY through the monetary policy announcement and hopefully beyond. I am looking for a test of uptrending support from its 50-day moving average (DMA).

The iShares MSCI Turkey ETF (TUR) gained 5.8% in apparent approval of the decision for snap elections. The November, 2017 low looks “safe” for now.

Be careful out there!

Disclosure: Short USD/TRY