20170721-法国巴黎银行-EM_STRATEGY_PLUS_45页_4mb

EM STRATEGY | GLOBAL WEEKLY - SUMMARY

Core Content

This document outlines the current market outlook and trade recommendations for Emerging Markets (EM) and Latin America (Latam) as of 21 July 2017. The central theme is "Low for Longer" inflation, which is expected to continue in EM, leading to a more dovish stance from central banks. The analysis covers key regions including China, Asia, South Africa, Turkey, Russia, and CEEMEA, with a focus on FX, interest rates, and credit strategies.

Main Themes

1. China: Stay the Course

• USDCNY has fallen to the 6.75 target, and the target for short USDCNH and NDF positions is extended to 6.70.
• Swap rates are expected to remain in a range, but CNH CCS may decline further.
• The Central Financial Work Conference (CFWC) emphasized long-term economic fundamentals and regulatory focus on the real economy and risk control.

2. Asia: Take Profit on Short SGD vs KRW

• Profit of about 2.1% was locked in on the short SGD versus KRW trade.
• The KRW has outperformed recently, and the cross rate has fallen to about 820.3.
• The SGD is expected to appreciate modestly against the USD, with USDKRW falling to 1,110 and USDSGD to 1.35 by year-end.

3. South Africa, Turkey, Russia: Refocusing on Inflation

• South African inflation is expected to remain within the target range, leading to further rate cuts.
• The SARB is expected to cut rates by 25bp to 6.75%, with potential for two more cuts in 2017.
• Inflation expectations in Turkey remain resilient, and the CBRT is likely to maintain its tight liquidity stance.
• In Russia, inflation may not repeat last year's high levels, leading to further real rate increases and potential policy actions.

4. CEEMEA Credit: Prepare for the August Grind Tighter

• CEEMEA credit is expected to benefit from a dovish US rates outlook and low volatility.
• A new recommendation is to buy Turkey $ '45s (spread over swaps), which are the cheapest in the CEEMEA credit monitor.
• Eskom bonds are considered fairly valued, but long-term risks are noted.

5. Latam: Market Adjustments and Policy Outlook

• In Brazil, the DI curve is pricing in rate cuts, and the BCB is expected to cut rates by 100bp in July.
• In Mexico, a TIIE 1s3s steepener is recommended due to the expectation of a rate-cutting cycle starting in Q1 2018.
• In Argentina, the recommendation to buy protection in 5y CDS against 5y EM CDX has been increased.
• In Chile, a flattener on the CLPxCAM curve is recommended.

Key Trade Recommendations

Trade Review Highlights

• Interest Rates: Total P/L of USD 5,563k, with significant gains in South Africa and Mexico.
• FX: Total P/L of USD 2,257k, with notable gains from the SGD/KRW trade.
• Options: Total P/L of USD 141k, with some losses from expired positions.
• Credit: Total P/L of USD 193k, with a focus on Turkey and Argentina.

What's Up Next Week

• Asia: Industrial production data from Taiwan, Singapore, and South Korea will be released, with limited market impact expected.
• CEEMEA: South Africa's June PPI data is expected to show a decline, and the CBRT will release its inflation report.
• Latam: Brazil's monetary policy meeting is the main highlight, with a likely 100bp rate cut. Colombia may also cut rates by 25bp.

Conclusion

The document highlights the ongoing trend of low inflation and a dovish policy stance in EM and Latam, with specific trade recommendations and analysis on how central banks are responding to economic conditions. It also outlines the potential for further rate cuts in key economies and the impact of regulatory changes on the market. The "Low for Longer" theme remains central, with a focus on capitalizing on the favorable investment environment.