Tactical short

Dünya Executive - - REPORT -

Phoenix Kalen, strategist, Societe Generale

We believe that current valuations in the Turkish lira, alongside high currency carry and still-favourable external market conditions, argue in favour of owning some limited long exposure to the lira. The Turkish lira is currently about 20 percent undervalue­d relative to its 10-year average in real effective exchange rates, while the forward curve is pricing in roughly 10 percent depreciati­on in the lira against US dollar over the next 12 months. Although geopolitic­al and domestic risks abound in the Turkey narrative, we believe that most risks are known by market participan­ts and that over the near term, the currency carry offers sufficient compensati­on against the various concerns. These are: Turkey’s growing involvemen­t in Syria and the potential for deeper conflict with the US or Russia or diplomatic stalemate between Turkey and the EU; Turkey’s purchase of

S-400 antimissil­e systems from Russia, detention of consular employees, etc.; and high inflation expectatio­ns and a weak inflation-targeting framework from the Central Bank and commodity prices.

(February 28)

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