20151030-法国巴黎银行-EM_Strategy_Plus_27页_4mb

EM Strategy Plus Summary - 30 October 2015

Core Content

This report from BNP Paribas provides an analysis of the potential impact of the Federal Reserve's rate hike on global markets, with a focus on Emerging Markets (EM) assets, currencies, and bonds. It outlines historical trends, current market positioning, and trade recommendations for investors.

Main Views and Key Information

Fed Rate Hike Outlook

• The report suggests that a Fed rate hike is more likely to occur in March 2016 rather than December 2015.
• Historical data indicates that before a rate hike, US bonds typically sell off, US yield curves flatten, and equities and DXY rally.
• After the rate hike, US yield curves flatten further, equities sell off, and DXY weakens.
• The current economic environment is different from past cycles due to:
  • Low global inflation
  • Regulatory changes
  • Divergent G4 central bank policies
  • China's growing influence on global markets

Currency Wars Resurging

• Policy divergence among developed market central banks is increasing the risk of currency wars.
• Real rate differentials are rising in favor of the USD, with China (due to its de facto USD peg) and Korea/Thailand facing pressure on their effective exchange rates.
• The IMF has called for global monetary policy coordination, but this is not currently in place.
• The DXY index has rallied 3% in recent weeks, suggesting USD strength.

EM FX Positioning

• Investors have increased their long USD positions against Asian currencies, particularly CNH, MYR, and PHP.
• The INR remains the only currency where the market appears meaningfully short the USD.
• Currency depreciation in EM is expected to be gradual, and carry trades such as short SGDINR, short MYRIDR, and long CLP versus CAD/AUD are seen as good value.

EM Local Rates

• The report highlights relative-value opportunities in EM local rates.
• Receivers of CNY 5y rates and payers of 2y MYR NDIRS are recommended.
• Country-specific opportunities are noted, with a bias towards short-end receivers and flattening curves in some EM markets.

EM Dollar-Denominated Bonds

• EM dollar-denominated bonds are considered vulnerable, as they have tightened by over 50bp in the past month.
• The report suggests a greater focus on EM local rates and FX for opportunities.

Regional Highlights

Asia

• RMB has been supported by PBoC intervention, but Asian currencies are expected to drift lower against the USD.
• Long USD positions are being rebuilt, with long USDKRW NDF and short MYR vs IDR recommended.
• Trade recommendations include long 1m USDKRW NDF, short 1y USDCNH straddles, and long 6m USDKRW DNTs.

CEEMEA

• Poland and Hungary have seen positive P/L on rate trades.
• Poland's 10y bond is expected to flatten further.
• RUB cross currency swap and PLN 2y2y fwd are highlighted as profitable trades.
• South Africa has a 2y USDZAR call spread recommendation.

Latam

• BRL has continued to appreciate due to lack of political news.
• Mexican markets reacted to the Fed's hawkish tone.
• The report suggests 2s5s receiver trades and short-end receivers due to flattening curves.
• Inflation data in the coming week is expected to reinforce rate hikes in Peru and Colombia, while Brazil may see higher inflation.

Trade Recommendations

Conclusion

The report emphasizes the importance of China in shaping global EM performance, particularly in the context of the Fed's rate hike and currency wars. It highlights carry trades, relative-value opportunities, and country-specific strategies as key investment approaches. The DXY index is expected to strengthen until March 2016, and EM local rates are seen as more promising than dollar-denominated bonds. Investors are advised to monitor China's economic indicators, including the October PMI and the Chinese Plenum, as they will influence the performance of EM assets.