The problem with pattern-matching in financial markets is that “THIS TIME” could be different. Difference is exactly what happened with my latest trading plan for the Turkish lira (USD/TRY). The well-constructed plans I described a few days ago quickly hit a brick wall, forcing me to pull the cord and adjust those plans.
The Central Bank of the Republic of Turkey (CBRT) announced on Sunday that it would pull out all the stops to protect “price stability.” Those measures were apparently quite effective; indeed, extra effective. As the Turkish lira quickly regained strength, I switched my plans to short some more EUR/TRY. I decided to ride the position downward, but the move happened a lot faster than I could have imagined. I closed out the position in two steps with the bulk of it happening after EUR/TRY bounced perfectly off the 6.0 level. Now, I am back to square one as USD/TRY trades currently below its 50-day moving average and a complete reversal of the March breakout.
I would prefer to sit on a long position in the Turkish lira (short EUR/TRY) and collect the large carry, but I do not think economic conditions can sustain a stronger currency or the large yield on the currency. Turkey’s reserves continue to drain at a fast clip (the reserves plunged
$6.3B to $28.5B just in the previous two weeks), and the CBRT is sure to face renewed political pressure to ease monetary policy at some point.
My current positioning assumes that the recent low on USD/TRY will continue to hold as support. In the meantime, I will be flipping smaller short positions on EUR/TRY. I am keeping the short positions smaller than the last “phase” of trading so that when the next bout of weakness happens in the lira, I will be more prepared to take profits on my long USD/TRY.
Be careful out there!
Full disclosure: long USD/TRY, short EUR/TRY