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Emerging Markets Briefer

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FX trading recommendation − Sell CHF/TRY

Thu, Apr 30 2009, 09:48 GMT
by Kasper Kirkegaard, Lars Christensen, Lars Rasmussen

Danske Bank A/S

We recommend selling CHF/TRY on a one-month horizon as a speculative play on the improved short-term outlook for emerging markets’ FX outlook on the back of increased global risk appetite.

Even though we still believe that the fundamental macro outlook for many emerging markets economies is relatively bleak, we expect some positive surprises on US economic data in the coming weeks/months – specifically we expect a positive ISM manufacturing surprise tomorrow.

In such environment EM FX could advance in the short term. A way to play this - with a high positive carry - would be a short position in CHF/TRY.

TRY – high carry:

The Turkish lira offers high carry for this trade and the Turkish currency in general performs well when the global sentiment improves. Next week’s inflation data will confirm the downtrend in inflation rates, which opens further monetary easing from the Turkish central bank. However, a key factor for a fairly stable currency outlook involves finalising the standby- agreement with the IMF – something we expect to happen in the coming weeks.

CHF – the SNB put:

We expect the Swiss National Bank to be successful in capping any potential short-term CHF appreciation and look for CHF to gradually weaken during 2009 on a continued improvement in risk sentiment and a sustained very expansive Swiss monetary policy.

Risk factors:

A key risk against this trade would be renewed fears over the swine-flu. Last night the WHO raised the current level of influenza pandemic alert from phase 4 to phase 5, but this did not seem to rattle markets with Nikkei rising 4.0% this morning.

Note that this trade is highly positively correlated with the global risk appetite.

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Published on  Thu, Apr 30 2009, 09:51 GMT