Playing the lira-rand game has lost its allure
With tide turning in SA’s fortunes and rand soaring, all bets are off
● The idea was simple: short the rand against the lira.
It was a trade that became popular in 2017 as South Africa’s prospects dimmed and Turkey’s looked as if they were improving. Bank of America and JP Morgan Chase were among the Wall Street banks that recommended it to their clients.
And for a while, it worked, especially after former president Jacob Zuma fired Pravin Gordhan, his much-respected finance minister, in March.
Until a turnaround in South African politics — triggered by Cyril Ramaphosa’s election as head of the ANC in December — sent the rand soaring, and concerns over Turkey’s widening current-account deficit and worsening international relations pushed the lira the other way.
“A lot of investors weren’t convinced Ramaphosa would win, plus the lira had been beaten up [in late 2016],” said Kevin Daly, a money manager in London with Aberdeen Standard Investments, which made a small loss on the trade.
“So it looked OK. Clearly, it was not a good one in the end.”
Daly doesn’t expect the trade to become enticing again any time soon because investors are looking at South Africa through a “different lens” after Ramaphosa replaced Zuma as president on Thursday. Turkey, he said, still looks vulnerable.
“We continue to expect a divergence between the lira and the rand, with the latter being favoured due to the positive reform narrative, disinflationary pressures, and potential for further portfolio inflows,” said Phoenix Kalen, a director of emerging-markets strategy at Société Générale in London.
Turkey’s diplomatic tensions, inflation of more than 10% and “lack of monetary policy credibility” all mean there’s a risk of “notable currency weakness”, she said.
Société Générale forecasts that the rand will strengthen 17% to 2.65 per lira by yearend, from Friday’s 3.11, which is already close to a record high for the rand, according to data compiled by Bloomberg from 1980.
In April, JP Morgan recommended going long on the lira against the rand when the exchange rate was 3.72. It closed the trade a month later after it lost about 3%. In all, the bank suggested the idea to clients six times last year, but it only made a profit once.
Bank of America recommended buying the lira against the rand on January 11 this year at 3.28 with a target of 3.5 and a stoploss — or point at which investors should end a trade that’s not made a profit — of 3.15.
Three months earlier, it closed the same trade when the rate was 3.76 per lira; it had targeted the rand weakening to 4.2.
“I don’t trust the lira-rand pair, though I know it’s very much in vogue in the traders’ community for a reason I just can’t understand,” said Cristian Maggio, the head of emerging-markets research at Toronto-Dominion Bank.
Rather than making specific bets on how individual emerging currencies will diverge from each other, using the dollar is easier, because you can take a view on developing countries as a whole, since their currencies tend to be partially correlated, he said.
“Playing lira-rand is like gambling,” Maggio said. — Bloomberg
I don’t trust the lira-rand pair, though I know it’s very much in vogue in the traders’ community Cristian Maggio Toronto-Dominion Bank