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  • USD/TRY trades -1.60% lower today, driven by a de-escalating in tensions between the West and Turkey as Erdogan stepped back from commitments to expel envoys over support for the release of Osman Kavala.
  • The cross has retracted -3.87% from Monday's high at 9.85, and is now trading a fraction below 9.50 with negative RSI divergence on the daily chart reflecting a near-term petering out in upside momentum.
  • Nevertheless, options markets are undeterred by recent strength in the currency amid a sizable CBRT easing cycle directly into oncoming CPI headwinds and renewed geopolitical frictions with the West.
  • 1m risk reversals continue to rise, moving back to June 2021 levels and above 5.00 points, having risen steadily since the beginning of October. While the 1m contract remains well below the elevated levels (8-12 points) seen in March 2021, April 2020 & August 2018, the steady rise is still concerning for TRY bulls – and reflects a persistent demand for USD/TRY upside protection as call volumes build.
  • Options markets price an implied probability of 35.3% that USD/TRY will be above 9.70 on a 1m horizon vs a 37.7% probability that it will be below 9.40. On a 2m basis (i.e. just before year-end), the probability of spot being above 10 has climbed to 27.7% vs 18.8% on a 1m horizon.
  • Sell-side expectations are somewhat more aggressive, however, than the options markets currently reflect following a swathe of 2021 target upgrades to 10.20-10.40 following last week's CBRT.
  • The sell-side also sees scope for at least another -100bp cut at the next meeting doing little to stabilise either the currency, inflation expectations or dollarisations risks – which are all set to tick higher into year-end, creating a snowballing effect of currency depreciation.