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EM Strategy Summary - 13 October 2017

Core Content

This document outlines the Emerging Markets (EM) strategy for the week of 13 October 2017, covering key themes, new recommendations, and trade reviews from various regions including Asia, CEEMEA, and Latin America (Latam). It also provides insights into upcoming events and market dynamics influencing EM currencies and bonds.

Main Themes of the Week

South Africa

• The medium-term budget policy statement (MTBPS) on 25 October is expected to highlight further delays in fiscal consolidation due to softening growth, inflation, and revenue collections.
• Institutional capacity and SOE burdens are significant concerns.
• The budget deficit is projected to deteriorate to 4.1% of GDP in FY17/18, up from 3.3% previously.
• There is a risk of credit rating downgrades by mid-2018, depending on the government's ability to address structural issues and maintain fiscal discipline.

Brazil

• A new model has been introduced to analyze real rates and breakeven inflation.
• The model suggests that real rates are unlikely to move significantly until breakeven inflation converges to lower levels.
• The framework uses forward rates (FRAs) and non-parametric distance measures to identify key drivers for each tenor.
• The model has shown solid performance with hit ratios above 80% and average returns of 45-90 bp across different tenors.

Latam FX Quarterly

• The BRL is expected to appreciate the most in the region.
• USDMXN is estimated to trade around 17.50 in the long-term.
• The COP and ARS are expected to depreciate against the USD.
• The CLPxCAM curve is expected to flatten further, and the 1y-2y flattener is considered a good opportunity.

Chile

• AFPs reallocating into equities could lead to lower CLP rates.
• The team recommends maintaining a 5y CLPxCAM paying position.

Mexico

• The existing hedge is not fundamentally driven but a potential strategy for receiving rate positions.
• The team recommends receiving 18m TIIE outright and rolling over the USDMXN 20.00 one-touch.

Colombia

• Non-residents hold 25.7% of public debt.
• Pension funds have increased their foreign equity allocation.

New Recommendations

Trade	PV01/Notional	Entry Level/Cost	Target	Stop	P/L	P/L (kUSD)
Long USDMXN OT 20.0 / Mat: 10-Jan-18 (extended)	USD 2mn	10 October 2017	-	--	-	-

Trade Review

Interest Rates

• Receive 2y THB NDIR: PV01/Notional = 5k USD, Entry = 19-Sep-17, Cost = 1.33%, Target = 1.38%, Stop = 1.00%, P/L = -5bp, P/L kUSD = -25
• Receive EUR/CZK 2y2y FWD: PV01/Notional = 10k USD, Entry = 29-Sep-17, Cost = 117bp, Target = 100bp, Stop = 125bp, P/L = 0bp, P/L kUSD = 0
• Pay 1y2y TRY xccy steepener (-13bp carry per 3m): PV01/Notional = 10k USD, Entry = 18-Jul-17, Cost = -44bp, Target = 0bp, Stop = -60bp, P/L = -18bp, P/L kUSD = -180
• Receive 2y2y fwd ZAR (+9bp per 3m): PV01/Notional = 10k USD, Entry = 18-Jul-17, Cost = 7.38%, Target = 6.80%, Stop = 7.60%, P/L = -14bp, P/L kUSD = -140
• Pay 5Y CNY NDIRS: PV01/Notional = 10k USD, Entry = 12-Sep-17, Cost = 3.80%, Target = 4.15%, Stop = 3.60%, P/L = -4bp, P/L kUSD = -40
• Receive Mexico TIIE 18m: PV01/Notional = 15k USD, Entry = 06-Oct-17, Cost = 7.25%, Target = 6.50%, Stop = 7.80%, P/L = -9 bp, P/L kUSD = -127
• Receive Brazil DI Jan-23 spread over US swap: PV01/Notional = 8k USD, Entry = 05-Oct-17, Cost = 766, Target = 730, Stop = 800, P/L = +2 bp, P/L kUSD = 19
• Receive Brazil DI Jan20sJan21s FRA: PV01/Notional = 50k USD, Entry = 17-Jul-17, Cost = 10.60%, Target = 9.75%, Stop = 11.45%, P/L = +4 bp, P/L kUSD = 322
• Flattening Chile CLPxCAM 1Y-2Y: PV01/Notional = 8k USD, Entry = 14-Jul-17, Cost = 24, Target = 0, Stop = 45, P/L = +6 bp, P/L kUSD = 62
• Receive Mexico TIIE 5y / Pay Colombia IBR 5y: PV01/Notional = 20k USD, Entry = 22-May-17, Cost = 187, Target = 100, Stop = 300, P/L = -2 bp, P/L kUSD = -17

FX

• Sell 3m EURINR: PV01/Notional = USD 10mn, Entry = 25-Sep-17, Cost = 78.54, Target = 76, Stop = 79.6, P/L = 0.52%, P/L kUSD = 52
• Sell 3m USDCNY NDF (rolled into fresh 3m): PV01/Notional = USD 20mn, Entry = 25-May-17, Cost = 6.9586, Target = 6.2, Stop = 6.8, P/L = 5.67%, P/L kUSD = 1134
• Sell 3m ZAR vs. TRY: PV01/Notional = USD 15mn, Entry = 23-Jun-17, Cost = 3.70, Target = 3.88, Stop = 3.55, P/L = -0.98%, P/L kUSD = -148
• Short USDCOP via 3m NDF: PV01/Notional = USD 8mn, Entry = 27-Sep-17, Cost = 2,971, Target = 2,820, Stop = 3,080, P/L = 0.14%, P/L kUSD = 11
• Short USDBRL via 3m NDF: PV01/Notional = USD 10mn, Entry = 20-Sep-17, Cost = 3.17, Target = 3.00, Stop = 3.29, P/L = -0.99%, P/L kUSD = -99
• Short USDARS via 3m NDF: PV01/Notional = USD 10mn, Entry = 14-Aug-17, Cost = 18.159, Target = 7.0%, Stop = -3.5%, P/L = 2.43%, P/L kUSD = 243
• Long BRL against a basket (CLP, EUR & AUD) via 1m NDF: PV01/Notional = USD 10mn, Entry = 07-Jun-16, Cost = 192.74/4.018/2.6285, Target = 196.13/3.757/2.4903, P/L = 16.19%, P/L kUSD = 1619
• Long BRL against a basket (CLP, EUR & AUD) via 1m NDF: PV01/Notional = USD 5mn, Entry = 09-Mar-17, Cost = 208.46/3.379/2.4005, Target = 196.13/3.757/2.4903, P/L = -2.86%, P/L kUSD = -143

Options

• Buy 3m USDINR ATMF (65.03) put: PV01/Notional = USD 10m, Entry = 24-Jul-17, Cost = 1.05%, Target = 0.33%, P/L = -0.72%, P/L kUSD = -72
• Buy at spot 3.55 1m PUT USD/TRY ATMF: PV01/Notional = USD 10mn, Entry = 29-Sep-17, Cost = 1.27%, Target = 0.54%, P/L = -0.73%, P/L kUSD = -73
• Buy 1y EURTRY ATM put (spot reference 4.1250 strike 4.64): PV01/Notional = EUR 10m, Entry = 07-Jul-17, Cost = 5.30%, Target = 3.60%, P/L = -1.70%, P/L kUSD = -170
• Buy 1y USDHKD call spread (7.70 vs. 7.80, 1X1): PV01/Notional = USD 100mn, Entry = 17-Mar-17, Cost = 0.54%, Target = 1.05%, P/L = 0.51%, P/L kUSD = 507
• Long USDMXN OT 20.0 / Mat: 10-Jan-18 (extended): PV01/Notional = USD 2mn, Entry = 10-Oct-17, Cost = 30.00%, Target = 42.36%, P/L = 12.36%, P/L kUSD = 247

Credit

• Buy Turkey '45s (spread over swaps): PV01/Notional = USD 5mn, Entry = 21-Jul-17, Cost = 344 bp, Target = 331 bp, Stop = 300 bp, P/L = 13 bp, P/L kUSD = 85
• Long Bocan (Badlar linked) March 2018: PV01/Notional = USD 5mn, Entry = 21-Sep-17, Cost = 102.00, Target = 103.30, P/L = 0.35%, P/L kUSD = 18

What's Up Next Week?

In Asia

• China: 19th National Party Congress starts on 18 October, with no major event risk expected.
• Indonesia and South Korea: Central bank meetings on 19 October, likely to keep rates on hold.
• Data releases: Philippines remittances on 16 October, China GDP, industrial production, and retail sales on 19 October.
• Cultural events: Deepavali in Malaysia and Singapore on 18 October, and Diwali in India on 19 October.

In CEEMEA

• South Africa: CPI data on 18 October, with expectations of a 4.9% y/y increase.
• Poland: Trade numbers on 16 October, with a forecast of a widening current account deficit.
• Production and retail sales: Data for September on 18 October.

In Latam

• Chile: Policy rate decision on 19 October, expected to remain on hold.
• Brazil: Mid-month CPI release on 20 October, expected to confirm inflation has bottomed out.
• Next week's focus: The BRL's potential appreciation and the CCB's monetary policy meeting.

Key Metrics

Category	Total P/L (kUSD)	Rates P/L (kUSD)	FX P/L (kUSD)	Options P/L (kUSD)	Credit P/L (kUSD)
Total	2438	-696	2669	362	103