We recommend buying TRY/ZAR. Last week we recommended selling CHF/TRY (see recommendation) as a speculative play on the improved global risk sentiment. This trade, which offers a high carry, is strongly positively correlated with global risk appetite. We hence recommend entering a long position in TRY/ZAR in order to significantly reduce sensitivity towards changes in the global environment, while maintaining a small carry.

TRY – Government re-shuffling and inflation coming down

On Friday night the Turkish Prime Minister Erdogan announced a cabinet reshuffle with eight ministerial changes. Most important are Ali Babacan’s return as new Economy Minister and the appointment of Mehment Simsek as new Finance Minister. We see these appointments as generally positive for the Turkish markets.

Turkish inflation (CPI) eased to 6.1% y/y in April from 7.9% y/y in March, below the consensus expectation of 6.9% y/y and our expectation of 6.8% y/y. Inflation is expected to continue to move lower in coming months, ensuring a continuing possibility of further monetary easing in Turkey. We expect average inflation for 2009E of just over 6%, falling to around 5% y/y by year-end. This is good news for the Turkish lira.

ZAR – The rand is overbought and inflation remains sticky

The rand (ZAR) continues to strengthen, which can to some extent be explained by the continued improvement in global appetite and appetite for carry. However, it is somewhat puzzling that the rand continues to significantly outperform other high beta-EM currencies like BRL, PHP and TRY.

Our short-term models indicate that the rand is seriously overbought against EUR and USD and most EM FX. Therefore we believe that there is value in shorting the rand – especially against other high beta EM currencies like TRY.

The South African central bank (SARB) continues to slash rates rapidly (see comment) despite inflation being rather sticky at 8.5% y/y (above the target zone of 3%-6%). The SARB remains dovish on the back of lacklustre domestic demand and worsening PMI surveys in April.

Risk factors:

A key risk to the present recommendation would be if the rand continues its strong rally, while the Turkish lira remains more stable, say, if there is no positive news out about finalising the stand-by-agreement with the IMF in the coming weeks. However, the trade is less sensitive to the global market development than selling CHF/TRY.