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EM Strategy Summary - 29 June 2018

Core Content Overview

This document outlines the EM Strategy team's analysis and recommendations for the week of 29 June 2018, focusing on South Africa, Turkey, and Latin America (Latam) markets. It highlights key economic data, market dynamics, and strategic positions in FX, interest rates, and bonds.

Main Points and Key Information

South Africa: Down, but Not Yet Out

• Economic Context: Disappointing Q1 balance of payments data have highlighted South Africa's twin deficits and structural vulnerabilities.
• Current Account Deficit: At 4.8% of GDP in Q1 2018, one of the largest in EM.
• FDI Outflows: Sixth consecutive quarter of outflows, reaching record highs.
• ZAR Vulnerability: High beta EM currency, vulnerable to global risk-off sentiment and EM sell-offs.
• Inflation and Policy: Inflation is expected to remain weak, and the SARB is unlikely to hike rates soon.
• Recommendation: Buy a 3-month USDZAR call spread with strikes 14.40/15.10 for a notional value of 1.06%, with a maximum payout of 3.5%.

Turkey: More Constructive on TRY

• External Debt and Current Account: External debt repayments are easing, and the current account deficit is seasonal, which should alleviate currency pressure.
• Inflation Outlook: Expected to rise to 15% in the next two months, preventing CBRT from easing rates.
• Carry and FX: The carry is at attractive levels, and the TRY is in a weak position.
• Recommendation: Buy a 1-month USDTRY one-touch at 4.30, costing 13% (spot reference: 4.58).

Latam FX Quarterly: FEER Model Update

• FEER Model: The nominal FX rate adjusts the current account to sustainable levels in the medium/long term.
• BRL Appreciation: The BRL has the highest margin for structural appreciation due to strong external funding capacity and steady FX flows.

DTCC FX Update: Favourable Positioning Setup for Latam

• Positioning Analysis: After recent EM/Latam FX depreciation, all Latam currencies (except COP) are in oversold territory.
• BRL and MXN: BRL is close to neutral positioning, and MXN has appreciated due to increased put volumes.
• Brazilian Real: Speculators are heavily long USDBRL, and a decrease in election uncertainty could lead to significant appreciation.

Argentina FX & Flows

• ARS Liabilities: Liquefying of ARS liabilities is ongoing, with accelerated capital flight.
• IMF Deal: Uncertainty remains about whether the IMF deal will change the dynamics of capital outflows.

New Recommendations

Trade Review

What's Up Next Week?

CEEMEA

• PMI Data: Manufacturing PMIs for South Africa, Russia, Czech Republic, Poland, Hungary, and Turkey will be released on 2 July.
• Turkey Inflation: Expected to rise to 13.9% y/y in June, with headline inflation likely to increase by 1.3% m/m on 3 July.
• Election Results: Official results of the presidential and parliamentary elections will be released on 5 July.

Latam

• Brazil Inflation: Expected to rise to 1.33% m/m in June, driven by the truckers' strike.
• FX Swaps: BCB is rolling over its FX swaps stock, with expectations of rolling all USD14bn FX swaps maturing at the end of August.
• Colombia Inflation: Non-tradable prices are declining, but food prices are not showing signs of a pickup, keeping headline inflation near the central target of 3% y/y.

Summary

• South Africa: The ZAR is vulnerable due to twin deficits and reliance on portfolio flows, with a recommendation to buy a USDZAR call spread.
• Turkey: TRY is in a more constructive position with easing external debt and a seasonal current account deficit, suggesting a potential recovery.
• Latam: BRL has the highest potential for structural appreciation, and all currencies except COP are in oversold territory, indicating support for a rally if global conditions improve.