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EM Strategy Weekly Summary - 3 February 2017

Core Content

This document provides an overview of the EM Strategy team's insights and recommendations for the week of 3 February 2017. It covers various regions including Asia, CEEMEA, and Latam, focusing on currency movements, credit strategies, and market outlooks.

Main Themes and Recommendations

Asia

• China: The Trump administration may focus on the bilateral trade balance when determining currency manipulation. This could lead to a reversal of USD hoarding and RMB strength in the short term. However, the medium-term outcome depends on whether a deal is reached between the US and China.
• India: The Reserve Bank of India is expected to keep policy on hold in 2017, despite the consensus expectation of a rate cut.
• Emerging Markets Currencies: The RMB and other Asian currencies may benefit from the potential reversal of USD hoarding due to the 'currency manipulator' label threat.

CEEMEA

• South Africa: The ZAR appreciation has slowed due to narrowing interest rate spreads. A 2m USDZAR call spread is recommended at a cost of 0.45% of notional, with a maximum payout of 2.7% at 14.20.
• Turkey: The TRY is expected to continue reversing its underperformance, supported by the CBRT's tight monetary policy. A EURTRY 1m put trade is recommended, with a zero cost and a stop loss at a 1.5% loss.
• GCC Sovereign Credit: Expectations for international debt issuance from GCC countries are outlined. Kuwait's Eurobonds are expected to trade flat to Abu Dhabi, reflecting its strong fiscal reserves and external position.

Latam

• Colombia: A tactical 1-3y IBR flattener is recommended, with a cost of -63 and a target of -90.
• Mexico: The MXN is considered one of the most attractive EM currencies. The team has reshaped their option strategy and taken profit on the 5y5y TIIE receiver and short USDMXN forward.

Key Information

Currency Manipulator Label

• The Trump administration may focus on the bilateral trade balance rather than other criteria.
• China is unlikely to meet the three criteria for being labeled a manipulator, but could still be targeted.
• The market impact would be a sharp RMB strengthening in the short term and increased uncertainty in the medium term.

FX Volatility and Strategy

• FX volatility has fallen, reducing the cost of call spreads.
• The USDZAR call spread is recommended due to the narrowing rate differential and potential for further ZAR appreciation.

Credit Strategies

• A switch from Saudi Arabia $ '46s to Qatar $ '46s is recommended due to the differential in credit profiles.
• The team has taken profit on the Turkey CDS trade and the sell Latam CDS basket protection.

Market Data and Outlook

• The US and China trade balance data are key factors in determining the currency manipulation label.
• The TRY has underperformed significantly against EM currencies, but is expected to reverse its trend.
• The CBRT is expected to maintain a tight policy stance, leading to continued TRY strength.

Summary Table

New Recommendations

Trade Review

Upcoming Events

Conclusion

The document highlights the importance of trade balance in determining the 'currency manipulator' label, the potential impact on EM currencies, and the strategic moves recommended by the EM Strategy team. It also outlines the team's trade review and upcoming economic events that may influence their recommendations.