20140704-巴黎银行证券-EM_Strategy_Plus_19页_1mb

EM Strategy Plus Summary - 4 July 2014

Core Content Overview

This document provides a weekly summary of investment strategy and trade recommendations for emerging market (EM) currencies, local debt, and credit instruments. It outlines the expected impact of key events on various markets and suggests trade positions based on economic fundamentals, market sentiment, and technical analysis.

Key Views and Asset Allocation

Asia

• Indonesia: The presidential election on 9 July is a critical event. Market reactions will be binary depending on the outcome:

  • A Jokowi/Kalla win could lead to a rapid decline in USDIDR to 11,700, followed by a gradual return to 12,000.
  • A Prabowo/Hatta win may lift USDIDR to 12,300, but the market is expected to remain cautious.
  • The central bank (BI) prefers a USDIDR range of 11,500-11,800. FX reserves are limited, and the market is neutral on IDR bonds, with expectations of 10y yields rising to 8.5%.

• India: The monsoon rainfall remains sub-par, leading to a recommendation to pay 1y INR NDOIS. The market is also short 1m USDINR NDF, targeting 59.40.

• Malaysia: The market is long MYR due to expectations of a rate hike. If the BNM fails to deliver, there could be unwinding of longs.

• South Korea (KRW): The won is approaching psychologically important levels, with USDKRW near 1000 (last seen in 2008). The BoK is likely to use a soft, multi-pronged approach, with fiscal stimulus being the most logical way to reduce the current account surplus. The market is recommended to stay received front-end and expect a stronger defense of the 1000 level.

CEEMEA (Central and Eastern Europe, the Middle East, and Eastern Asia)

• Hungary (HUF): The HUF has overperformed, and we have taken profit on the long PLNHUF position. We remain bullish on the PLN and recommend a short EURPLN trade, targeting 4.05 with a stop at 4.17.

• Romania (RON): We expect limited scope for further declines in EURRON and recommend short RON positions.

• Russia (RUB): Tensions with the US and EU over Ukraine are rising, and a step-up in sanctions is likely. This could lead to renewed pressure on the RUB. We recommend positioning for weakness via 3m USDRUB RKO at 34.50/35.50 strike, and we have closed our 1s5s x-ccy steepener. The RUB is expected to weaken despite high real and nominal rates.

• Poland (PLN): We recommend buying POLGB Jul'18s and POLGB Oct'23s, as low inflation and low rates will continue to drag the longer end of the curve down. We also suggest a short EURPLN trade.

• Turkey (TRY): We remain bearish on the TRY and continue to hold 3m USDTRY RKO at 2.20/2.35 strike. We also recommend short TRYBRL positions.

Latin America (Latam)

• Argentina: The country missed its 30 June coupon payment, creating a 30-day grace period. A negotiated settlement with holdout creditors is expected, and we recommend buying 5y Argentina CDS at 146bp, targeting 180bp. A default is considered a worse outcome, with a 20% probability of no agreement.

• Brazil (BRL): We are long Brazil's BEI, as inflation is expected to rise above the 4% ceiling. We also recommend a short BRL position through a 3m USDBRL NDF trade.

• Mexico (MXN): The TIIE curve is steep, so we hold a flattener (TIIE 2s5s). Inflation is expected to remain above 3.0% in 2015, and we are long breakeven inflation (UDIa 2y and TIIE 2y). We expect a rate increase in 2015, supporting the flattening trade.

• Chile (CLP): Growth is expected to remain subdued, but the worst scenario is already priced in. We are long CLP against USD and NZD. The back end of the swap curve remains depressed, and higher UST yields will support long tenor rates.

• Overall: US monetary policy and UST yields are the only exogenous drivers for Latam risk assets. A sustained period of low volatility is distorting risk premia, and we remain vigilant on tail risks.

New Recommendations

Trade Review

• Interest Rates: We have taken profit on the long ROMGB 07/17 position and closed the RUB 1s5s x-ccy steepener. We have re-entered the receive HUF 5y5y FWD trade and are long POLGB 07/18 and POLGB 10/23.

• FX: We sold USDSGD spot, USDINR NDF, USDBRL NDF, and USDCLP. We are also short USDTRY and USDZAR.

• Credit: We are long 5y Indon CDS, with a target of 180bp. We are also long PLNHUF and EURHUF call spreads.

• Options: We are long USDTRY and USDRUB RKO, as well as USDZAR call spreads. We are also long USDINR DNT and SGD FVA.

• Total P/L: USD 4,112,000

Market Outlook

• Asia: High event risks with the Indonesian election, Indian budget, and Malaysian MPC meeting. The IDR is expected to react strongly to the election outcome, with either a sharp decline or a moderate rise.

• CEEMEA: Currencies have held up well, but the RUB is under pressure due to geopolitical tensions and sanctions. The TRY is expected to weaken, and the HUF is overbought.

• Latam: Inflation remains a key driver, with Brazil and Mexico facing potential rate hikes in 2015. Argentina is in a delicate situation with a high probability of a negotiated settlement.

Conclusion

The document outlines a strategic approach to EM currencies and debt, emphasizing the importance of monitoring key political and economic events. It suggests a mix of short and long positions based on market dynamics, inflation expectations, and central bank policies. The recommendations are tailored to different regions, with a focus on risk management and profit-taking in volatile markets.