UBS Bets This Time Is Different; Shorts Rand Versus Lira

JOHANNESBURG (Capital Markets in Africa) – Shorting the rand against the lira is a popular trade that doesn’t always pay off. But this time is different, a technical signal suggests.

UBS Group AG on Wednesday recommended the trade, which Wall Street heavyweights including Bank of America Corp. and JPMorgan Chase & Co. have tried in the past without success.

The rand has been the best performing currency in the world this year with a 7 percent gain against the dollar as risk appetite returned to global markets. Against Turkey’s lira, the South African currency has advanced 5.1 percent after last year’s 20 percent surge. But a technical signal suggests this trend may be about to change.

The short-term average for the lira-rand has climbed above the long-term mean for the first time in more than a year, a so called golden cross that indicates a buy signal to some traders who follow chart patterns.

“The South African rand and Turkish lira were both beneficiaries of the shift in the Fed’s outlook to a more neutral stance and the favorable sentiment toward risky assets, including those from emerging markets,” Tilmann Kolb and Jonas David, London-based strategists at Zurich-based UBS, said in a note to clients. But the currencies may diverge in the short term, they said.

“The rand has significantly outperformed, but we see limited room for this trend to extend and expect some reversal, driven by both global and domestic factors,” the UBS strategists wrote. “The Turkish central bank’s hawkish stance and high policy rate support the lira in the near term.”

The rand weakened 0.3 percent to 2.5784 per lira by 3:26 p.m. in Johannesburg.

Source: Bloomberg Business News