SocGen Favors Naira for Stability as Rand Set for 4-Year Low

Investors should buy Nigeria’s naira against the rand, betting on the stability of the currency of Africa’s biggest oil producer against deteriorating conditions in South Africa, Societe Generale SA said.

The rand may retreat to 9.2 per dollar, the weakest in almost four years, while the naira will probably continue to trade within the Nigerian central bank’s targeted peg of 3 percent below or above 155 per dollar, Souheir Asba, a London-based strategist at SocGen, wrote in an e-mailed note to clients today. Investors should short three-month rand versus three month naira non-deliverable forwards with an entry at 17.7393 naira per rand and exiting at 18.1, Asba said.

“The South African Reserve Bank maintains its position of desiring a weaker rand as deteriorating domestic conditions in South Africa are threatening its economy,” said Asba. “The naira on the other hand has enjoyed a relative stability” and “the central bank has now the determination and the means to keep it within that band,” Asba said.

The rand slumped after three credit rating downgrades since October and as labor disputes shut gold and platinum mines, cutting South Africa’s gross domestic product by 0.5 percentage point, according to the National Treasury. The currency of Africa’s biggest economy has declined 4.5 percent this year versus the dollar, the worst performer among emerging-market peers.

The naira increased 3.9 percent in 2012, the best performing currency in Africa, after the Central Bank of Nigeria left interest rates at a record high 12 percent and as JPMorgan Chase & Co. added the country’s debt to its emerging-market bond index series in October. The currency has retreated 0.7 percent this year.

The main risk against this trade is increased Islamic militancy in Nigeria, which could trigger speculation against the naira, Asba said. The government has been battling the Boko Haram group, which has carried out gun and bomb attacks in the north and in the capital Abuja, killing hundreds of people since 2009.

Before it's here, it's on the Bloomberg Terminal.