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EM Strategy Summary - 14 March 2018

Core Content

This document provides an overview of the Emerging Markets (EM) strategy for the day, highlighting key developments in currency and interest rate markets across CEEMEA (Central and Eastern Europe, the Middle East, and Eastern Europe) and Latin America (Latam), with a focus on Turkey and Argentina.

Global Market Outlook

• Equities: Global equities are slightly lower, while credit spreads in Asia have widened by 1-4bp.
• US-China Trade Tensions: The dismissal of Rex Tillerson as Secretary of State and potential increases in US tariffs on Chinese imports have contributed to market volatility.
• FX Performance: Asia FX has remained relatively stable, with the Turkish Lira (TRY) and USDTRY showing signs of depreciation pressure.

Turkey

• TRY Ccy Rates Payer: BNP Paribas has closed a 1y1y TRY ccy rates payer at 13.60%, yielding a profit of +40bp (including carry/roll-down).
• TRY FX Depreciation: The document suggests a possibility of accelerated depreciation in the TRY.
• Market Sentiment: Investors have been losing money on long TRY positions over the past 6 months, as the TRY has depreciated faster than expected by forward rates.
• Interest Rate Curve: The steepening of the 1y cross-currency (CCY) curve has limited spot depreciation, but with no rate hikes priced in for up to 3 months, this steepness is unlikely to be sustained.
• Recommendation: To position for potential depreciation, the report recommends owning a USDTRY 3-month 25 delta call option at 1.05% of notional value (spot reference: 3.85).
• Chart 1: Shows the 12-month TRY basket realized forward returns indicating strong downward momentum.
• Chart 2: Illustrates the steepening of the 1y CCY curve as an initial defense against FX depreciation.

Argentina

• Central Bank Decision: The Argentine Central Bank (BCRA) left the 7-day repo rate unchanged, as widely expected.
• Currency Pressure: Structural issues continue to pressure the peso, prompting the BCRA to intervene in the FX market.
• Monitoring: The team continues to monitor developments in the country with caution.

Key Information

• Investor Behavior: Strong local demand for hard currency suggests that current Turkish interest rates may not be sufficient to attract foreign investors.
• Forward FX Uncertainty: The report expects increased uncertainty in forward FX rates, which could accelerate spot depreciation of the TRY.
• Hungary: The Hungarian Central Bank (MNB) is conducting another round of IRS tenders today. The previous tender did not lead to a significant sell-off, indicating muted market impact.
• HUF-EUR Swap Rates: The 5y swap rate differential has tightened from 85bp to 65bp, with investors who received rates at the peak sitting on accumulated profits of nearly 20bp.
• Market Impact: The MNB's upcoming minutes from its February meeting are expected to be published, adding to market analysis.

Contacts

Emerging Markets Research

• Wike Groenenberg
  Head of Emerging Markets Research, CEEMEA & APAC
  BNP Paribas London Branch
  +44 20 7595 8746

• Piotr Chwieczak
  FX & IR CEEMEA Strategist
  BNP Paribas London Branch
  +44 20 7595 8715

• Sai Ulluri
  FX & IR CEEMEA Strategist
  BNP Paribas London Branch
  +44 20 7595 1872

• Erkin Isik, CFA
  FX & IR CEEMEA Strategist
  Turk Ekonomi Bank A.S. (Istanbul)
  +90 216 635 2987

FX & IR Latam Strategy

• Gustavo Mendonca
  FX & IR Latam Strategist
  Banco BNP Paribas Brasil S.A. (Sao Paulo)
  +55 11 3841 3445

• Gabriel Gersztein
  Head FX & IR Latam Strategy
  Banco BNP Paribas Brasil S.A. (Sao Paulo)
  +55 11 3841 3421

• Samuel Castro
  FX & IR Latam Strategist
  Banco BNP Paribas Brasil S.A. (Sao Paulo)
  +55 11 3841 3492

Asia Strategy

• Mirza Baig
  Head of FX & IR Asia Strategy
  BNP Paribas Singapore Branch
  +65 6210 3262

• Dawn Kwa
  Graduate
  BNP Paribas Singapore Branch
  +65 6210 3263

• Altaz Daga
  AU/NZ IR Strategist
  BNP Paribas Singapore Branch
  +65 6210 4994

• Kun Shan
  China Strategist
  BNP Paribas China Limited (Shanghai)
  +86 21 2896 2773

• Tianhe Ji
  China Strategist
  BNP Paribas China Limited (Beijing)
  +86 10 6535 0836

Production & Editorial Contacts

• Barbara Consuelo
  Production
  BNP Paribas London Branch
  +44 20 7595 8486

• Amanda Grantham-Hill
  Editorial
  BNP Paribas London Branch
  +44 20 7595 4107

• Anna McLaughlin
  Editorial
  BNP Paribas London Branch
  +44 20 7595 3754

• Varghese Joseph
  Editorial
  BNP Paribas Securities Corp (New York)
  +1 212 841 3698

Legal Notice

• Non-Independent Research: This document is non-independent research and may be subject to conflicts of interest.
• Marketing Communication: It is a marketing communication under MiFID II and not investment research.
• Disclaimer: The document is for informational purposes only and does not constitute an offer to sell or issue any financial instrument.
• No Liability: BNPP disclaims all liability for any use of the information or for any reliance on it.
• Confidentiality: The information is provided on a strictly confidential basis and may not be distributed without prior consent.
• Regulatory Compliance: The document is subject to various regulatory requirements and disclosures in the US, UK, and France.