Pre-election volatility expectations of the lira rise against the dollar

Expectations for the fall and volatility of the lira continue to rise ahead of the May 14 elections.

According to the Bloomberg news, the implied volatility of the TL against the dollar has reached the highest level in the world. The lira’s implied volatility against the dollar next week rose to 64 percent from 8.4 percent on Friday, outperforming all other currencies.

The concept of implied volatility is used to calculate the market’s expectation of the future volatility of an asset.

On the other hand, the market expects the lira to weaken significantly as it is concerned about the sustainability of government controls on the lira regardless of the election results.

Based on Bloomberg calculations from trading option prices, derivatives traders see the dollar/TL likely to rally to the 26 level by the end of the third quarter.

ARTIFICIAL SUPPORT FOR EXCHANGE

In a note published on Monday, Commerzbank strategist Ulrich Leuchtman said there may be a significant drop in the Turkish lira. “The artificial support of official exchange rates will weaken and possibly become impossible to sustain any longer,” Leuchtman said, adding that the government will no longer have the political motivation to defend its claim for lira stability to voters.

While the lira has fallen 23 percent in the past year to record lows, Commerzbank sees the lira’s performance as a reflection of the country’s own mismanagement. For this reason, a fall in the lira is not expected to have a ripple effect in other developing countries.

Noting that Turkish monetary policy mistakes are not repeated in other countries, Leuchtman said: “I find it hard to imagine how the failure of this very specific monetary policy will affect other currencies, where central banks behave very differently.” .