A Ray Of Sunshine For The Carry Trade On An Otherwise Stormy Day

Well hell, at least there’s good news somewhere on Tuesday.

As noted in “VaR Shocks, Panic Selling, Outflows And (Maybe) More To Come“, today’s panic selling in BTPs represents the latest leg of an ongoing unwind that started with the February VIX-centric chaos and continued apace with carry blowup in EM.

Last week I characterized the following chart as indicative of the carry unwind:

Nedbank’s Neels Heyneke and Mehul Daya, in their latest note, highlight the following chart, noting that it represents “the first phase of the correction (in risk-assets)” (as you can see in the chart header, they expect this to take a breather in the short-term, but their longer-term outlook calls for “another major risk-off phase”):

Well since last week’s panicked run on the Turkish lira, CBT has managed to get a grip on things, first with an emergency LLW hike and then with Monday’s announcement that monetary policy would be simplified going forward.

That news led to one of the best days for the previously beleaguered lira in quite some time and the rally continued on Tuesday amid the following headlines:

TURKEY IS SAID TO BE READY TO HIKE RATES IF MAY INFLATION RISES
TURKISH OFFICIALS TO STEER CLEAR OF CAPITAL CONTROLS: SOURCES

LOL. "steer clear" is something different than "definitely won't do"

— Heisenberg Report (@heisenbergrpt) May 29, 2018

You can color me skeptical (as you can see by the sarcasm there), but for now, that’s helping the lira to trade stronger again after falling earlier in the day amid the broader risk-off tone. Here’s an annotated chart going back to last week’s panic and rate hike:

The Turkey ETF is higher on the news and at one point was up more than 6% on the day.

So there you go, a ray of sunshine for the carry trade on a day when everything else is shot to shit.

But curb your enthusiasm, because you know…