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Close short TRY/BRL recommendation as FX policy diverged from our expectations
On 19 March 2012, we introduced a short TRY/BRL recommendation on the back of two key arguments:
- In our view, the policy mix in the Turkish economy was conducive to sustained imbalances, which increased the downside risks for the Lira.
- The market had overreacted to recent policy announcements in Brazil aimed at arresting currency appreciation.
Since then, CBRT policy has been less accommodative than we expected, partly to stabilise the currency, and the data has surprised to show a moderate improvement in local imbalances. BRL has continued to trade a lot softer than we anticipated mostly due to FX policy intervention and despite less dovish BACEN communication.
As a result, we would recommend clients close short TRY/BRL positions with a potential loss of 3.1% including carry.