EM Strategy Summary - 2 February 2018
Core Content
This document outlines the EM Strategy team's analysis and recommendations for the week of 2 February 2018, focusing on FX, interest rates, and credit strategies across various regions including CEEMEA, Asia, Latin America, and Africa. The report also examines the broader implications of the US's international investment position (IIP) and its impact on EM economies.
Main Themes and Recommendations
Asia FX: Ripe for a Pullback
- Technical Setup: Asian currencies are in a technical setup for a corrective sell-off.
- USD Movement: Expect USD to rise as the US yield curve re-steepens.
- Recommendation: Long USDKRW with a target of 1,095 and a stop-loss at 1,060.
China: CGBs to Continue to Outperform
- Support Factors: CGBs are supported by cheap valuations and strong banking book demand.
- Recommendation: Buy 5-year CGBs at current levels.
India Budget: Talk Easier than Walk
- Budget Deficit: FY18 and FY19 budget deficit slippage is expected to be worse than anticipated.
- Tax Impact: A long-term capital gains tax of 10% on equity gains above INR 100,000 will be effective immediately.
South Africa: Zuma Exit Uncertainty
- Political Outlook: Cyril Ramaphosa may need to engineer a power transfer in Q1 2018 to sustain positive sentiment.
- Party Controversy: The process is highly contested within his party.
South Africa: Mining Sector as a Rally Driver
- Agenda Focus: Mining and the Department of Mineral Resources are likely to be priorities for Ramaphosa.
- Economic Impact: Mining has large activity and employment multipliers into manufacturing.
Brazil: Take Profit on Local USD Rates Payer Position
- Market Convergence: Market levels and model estimates have converged, leading to profit-taking.
- Recommendation: Lock in profit on the Jan19sJan23 local USD payer recommendation.
New Recommendations
| Trade |
PV01/Notional |
Entry Level/Cost |
Target |
Stop |
P/L |
P/L in kUSD |
| Long 1m USD/KRW |
USD 10mn |
1,075 |
1,095 |
1,060 |
0.19% |
19 |
| Buy 1-month USDZAR call spread (1x 12.50/1x 12.80) |
USD 10mn |
0.36% |
- |
- |
-0.80% |
-80 |
Trade Review
Interest Rates
| Trade |
PV01/Notional |
Entry Date |
Entry Level/Cost |
Current |
Target |
Stop |
P/L |
P/L in kUSD |
Closed Date |
| Receive 5y HUF IRS (stopped out) |
5k USD |
19-Jan-18 |
1.02% |
1.23% |
0.80% |
1.20% |
-17bp |
-85 |
02-Feb-18 |
| Receive 5Y CNY NDIRS |
10k USD |
10-Nov-17 |
4.12% |
4.01% |
3.85% |
4.25% |
+11bp |
110 |
- |
| Receive 1y1y KRW NDIRS |
10k USD |
18-Jan-18 |
2.20% |
2.26% |
2.05% |
2.30% |
-4bp |
-40 |
- |
| Pay Brazil Cupom Cambial Jan19sJan23s FRA |
7.5k USD |
15-Jan-18 |
3.26% |
3.53% |
3.75% |
2.95% |
+27 bp |
199 |
01-Feb-18 |
| Flattening Colombia IBR 9M-18M |
20k USD |
10-Nov-17 |
9 |
10.2 |
-15 |
35 |
-1 bp |
72 |
- |
| Receive Brazil DI Jan20sJan21s FRA |
USD 50mn |
22-Dec-17 |
10.60% |
10.36% |
9.75% |
12.00% |
+24 bp |
1429 |
- |
| Long USDBRL OT 3.12 / Mat: 19-Mar-18 |
USD 1.5mn |
19-Dec-17 |
29.50% |
65.50% |
- |
- |
36.00% |
540 |
- |
| Long USDMXN OT 20.0 / Mat: 10-Apr-18 |
USD 1.5mn |
24-Nov-17 |
43.25% |
16.83% |
- |
- |
-26.42% |
-396 |
- |
| Long Jun19 USDiBonos |
USD 25mn |
07-Dec-17 |
3.33% |
3.65% |
3.06% |
4.00% |
-32 bp |
-527 |
- |
| Buy Argentina 5Y CDS vs Sell 5Y Brazil/Mexico/Colombia CDS |
USD 30mn |
08-Nov-17 |
124 |
122 |
175 |
95 |
-2 bp |
-138 |
- |
FX
| Trade |
PV01/Notional |
Entry Date |
Entry Level/Cost |
Current |
Target |
Stop |
P/L |
P/L in kUSD |
Closed Date |
| Long USDCLP via 3m NDF |
USD 7mn |
15-Jan-18 |
602.2 |
597.600 |
621.0 |
586.0 |
-0.77% |
-54 |
- |
| Short USDOPEN via 3m NDF |
USD 10mn |
18-Dec-17 |
3.29 |
3.22 |
3.19 |
3.35 |
2.34% |
234 |
- |
Options
| Trade |
PV01/Notional |
Entry Date |
Entry Level/Cost |
Current |
Target |
Stop |
P/L |
P/L in kUSD |
Closed Date |
| Buy 1-month USDZAR call spread (1x 12.50/1x 12.80) |
USD 10mn |
02-Feb-18 |
0.36% |
0.36% |
- |
- |
-0.80% |
-80 |
- |
| Buy 1y USDHKD call spread (7.70 vs. 7.80, 1X1) |
USD 100mn |
17-Mar-17 |
0.54% |
1.20% |
- |
- |
0.51% |
507 |
- |
| Long USDBRL CS 3.55/3.85 maturity: 23-Ago-18 |
USD 50mn |
22-Dec-17 |
1.70% |
0.83% |
- |
- |
-0.87% |
-435 |
- |
Credit
| Trade |
PV01/Notional |
Entry Date |
Entry Level/Cost |
Current |
Target |
Stop |
P/L |
P/L in kUSD |
Closed Date |
| Long Jun19 USDiBonos |
USD 25mn |
07-Dec-17 |
3.33% |
3.65% |
3.06% |
4.00% |
-32 bp |
-527 |
- |
| Buy Argentina 5Y CDS vs Sell 5Y Brazil/Mexico/Colombia CDS |
USD 30mn |
08-Nov-17 |
124 |
122 |
175 |
95 |
-2 bp |
-138 |
- |
Key Findings
- IIP Trends: Over the past 40 years, the US IIP has deteriorated while Asian and European 'savers' and large EM economies have improved.
- USD Appreciation: The bulk of the US IIP deterioration since tapering was due to USD appreciation, driven by higher long-term rates.
- Global Savings Glut: EM, Asia, and Europe have seen an increase in global savings, leading to a shift in the allocation of these savings to USD assets and EM.
- Inflation Expectations: Rising US inflation expectations (approaching 2%) signal a potential tightening of liquidity, which could impact USD performance.
- CEEMEA Performance: CEEMEA assets are benefiting from the global savings glut, but are vulnerable to a correction if USD appreciates further.
Conclusion
- The permanent increase in savings in Europe and Asia means long-term US rates are key for the distribution of global savings between USD assets and EM.
- EM performance has been positive since Q3 2017, despite rising US rates, due to improved funding capacities.
- The risk of a correction in USD/EM currencies is higher as the global savings glut continues, but the positive returns on long-term positions may provide some buffer.
- Countries with high current account deficits, like Turkey, are particularly vulnerable to currency corrections due to their reliance on external financing.
