Goldman warns!

The risks for the Turkish Lira appear very skewed to the downside at current exchange rate levels. This doesn't mean we expect a mini-crisis like in Spring, but the potential for some TRY depreciation now appears larger than the carry gains on a tactical trade.
The general environment for EM assets appears to offer limited upside given current valuations. As Mike Buchanan and Salman Ahmed pointed out in their Global Daily this morning, a moderate deterioration in the US and global growth outlook could make current EM valuations look stretched. Yesterday's release of the latest reading of our Global Leading Indicator also points to further slowing in global growth momentum. Most recent data releases from around the globe confirm the idea of gradual slowing cyclical momentum. Most EM assets have ceased to strengthen since the middle of the week, while country specific factors have led to some weakness as in the case of Mexico (falling oil prices).
On the domestic front, Turkey continues to be exposed to significant tension in the external accounts. While the current account continues to deteriorate (our latest estimate for 2006 is 8.3% of GDP), strong speculative inflows have - so far - helped finance the deficit. These have been attracted partly by high local rates and the generally favourable environment for carry trades recently. However, our Yield Outperformance Slice indicates that carry trading has become less profitable recently with zero total returns since late October. Deteriorating performance of global carry trades could make it considerably more difficult to finance the Turkish the current account deficit. It is also worth pointing out that the TRY remains substantially overvalued according to GSDEER, and therefore any attempts to correct external imbalances through slowing domestic demand will remain an uphill struggle for the Central Bank. It may well be related to this factor that the Central Bank on Monday started again to buy foreign currency in daily operations against the TRY (up to $900mn per month) - another factor limiting the upside potential for the TRY from current levels. On the other hand, it is clear the TRY would have to weaken substantially before the CBRT would intervene to support the Lira.
Finally, there remain questions about the political outlook. The EU's Cyprus decision is due next month. And significant uncertainty and risk still surrounds next year's general elections and the question of who will become the next President.
Overall we think the downside for a long EUR/TRY trade is limited at these levels and it makes sense to pay the carry with most factors suggesting more weakness in the not-so-distant future.
Go long $/TRY with a 1-day stop on a close below 1.4300.