Barclays recommends buying lira

Bloomberg

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A global pickup in investor demand for higher-yielding assets and signs the worst of the recession is over "bode very well for the comeback of the emerging-market carry trade," analysts including Andrea Kiguel in New York wrote in a report last week. Carry trade refers to the practice where investors borrow funds in a country with lower interest rates and then invest the money in nations where returns are higher.

Brazil’s real has gained 18 percent in the past three months against the U.S. dollar while the lira has advanced 10 percent. South Africa’s rand is up 22 percent, the best performing emerging-market currency in the past three months.

"As the decline of global risk aversion gives way to the re-pricing of U.S. dollar, we see potential for emerging-market foreign exchange to continue rallying," Barclays analysts wrote. Emerging-market currencies will also attract investors because interest rates in developing nations remain high relative to those in industrialized countries, they said.

Interest rate policies

Turkey’s key benchmark interest rate stands at 9.25 percent, compared with a range for overnight loans between banks of zero to 0.25 percent in the U.S. Brazil’s benchmark interest rate is 10.25 percent.

Continued gains in emerging-market currencies have increased the risk that central banks may buy dollars in the foreign-exchange market to slow the rally, Barclays said.

Brazil’s central bank began buying dollars on May 8, the first purchases since September. Last week, Brazilian central bank President Henrique Meirelles cautioned investors not to load up on bets on the real as signs an "excess of euphoria" is building on the pace of the country’s economic recovery.

"With conditions set for continued emerging-market foreign-exchange strength, it is likely that emerging-market central banks start [or continue] to lean against the appreciation wind, slowing or limiting the aforementioned upside as a result of dollar weakness and lower risk aversion," Barclays said.