Morgan Stanley: Turkish lira is headed for record lows

Buying the Turkish lira may have been an easy punt after Sunday’s presidential election, but it may be better to sell a rally in the currency.

The lira jumped more than 3 percent early on Monday as investors cheered an end to the political uncertainty hanging over markets. But with all headwinds that the economy faces still in place and uncertainty over plans to tackle them, the currency has reversed its gains and Morgan Stanley thinks it will be soon be hitting fresh record lows.

The cost of hedging against price swings in the lira over the short term has surged above long-term protection in the options market, which means traders can effectively position for a stronger lira by betting on that anomaly to reverse. There has been “decent interest” among hedge funds to position for a lower dollar-lira via options, Morgan Stanley said.

“We are ready to buy on the dip and expect it to be making new highs before too long,” Morgan Stanley analysts including James Lord wrote in a note, referring to the dollar-lira pair.

The lira was trading 0.4 percent weaker at 4.6950 per dollar by 2:20 p.m. in Istanbul. The currency’s one-month implied volatility fell to a six-week low.

Turkish assets have been under pressure this year as President Recep Tayyip Erdogan resisted interest-rate increases that many investors said were necessary to cool an economy that relies heavily on external financing. While the central bank has raised interest rates by 500 basis points since April, Erdogan’s drive to underpin the economy has left a question mark over how committed policy makers are to an economic adjustment.

“So far, there is little to suggest that the election will result in a new macro policy framework, which is required, in our view,” the analysts said. “As such, the election result suggests status quo, which in recent years has not produced positive results for asset prices.”

Source: Reuters