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EM STRATEGY DAILY - 09 March 2018 Summary

Core Content Overview

This document is a daily market strategy report from BNP Paribas, focusing on Emerging Markets (EM) and providing insights into key economic indicators, currency movements, and central bank policies in various regions.

Key Regions and Topics

United States

• Focus: US payroll and earnings data.
• Expectations: A solid US payrolls print of 225k and average hourly earnings growth to tick down to 2.8% y/y.
• ECB Policy: The ECB removed its easing bias on QE, seen as a backward-looking decision with limited implications for future policy expectations.

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

• Poland:
  • The PLN weakened against the EUR.
  • The belly of the Polish curve has rallied by c. 8bp due to NBP Governor Glapinski's comments on potential rate cuts.
  • The 2y2y PLN-EUR rates differential is at its lowest since September 2016.
  • The market is at risk of falling behind in pricing rate hikes.
  • Expect PLN to marginally outperform EURPLN forwards in the near term.
• Czech Republic:
  • February CPI data showed a slight moderation to 1.8% y/y, slightly below expectations.
  • EURCZK rose by 0.2% immediately after the data release.
  • 1-month realised forward returns for long CZK positions are now 1 std. dev. below the long-term average.
  • Historical patterns suggest strong mean reversion, so further underperformance is unlikely.
  • If underperformance persists, the Czech National Bank (CNB) may turn more hawkish.
  • EURCZK is expected to remain at 24.50 by end-2018, in line with CNB's forecast.

Turkey

• Moody's Downgrade: The sovereign rating was downgraded to Ba2 from Ba1.
• TRY Dynamics: 1y1y TRY cross-currency rates increased by 25bp.
• Central Bank Strategy: The central bank is likely to raise interest rates only if the TRY depreciates further.
• Inflation Target Overshooting: The current strategy has led to overshooting inflation targets, limiting future inflation declines.
• Expectations: TRY appreciation is expected to intensify via higher cross-currency swap rates.

Latin America (Latam)

• Brazil:
  • February IPCA is expected to remain below 3% y/y.
  • Markets are pricing in a potential 25bp rate cut at the next monetary policy meeting.
  • The belly of the DI curve carries a substantial premium.
  • Recommendation: Receive the FRA Jan20sJan21s, which is still trading above 10% onshore.
• Mexico:
  • Recent CPI dynamics support a below-consensus forecast of 3.5% y/y by year-end.
  • Forecast is supported by the reversal of 2017 non-core CPI shocks, weak domestic demand, lower FX pass-through, and a marginally stronger MXN.

Asia

• Hong Kong:
  • The Hong Kong Monetary Authority (HKMA) will not increase EFN bill issuance but may intervene in FX if USDHKD reaches the top of the 7.75/7.85 trading band.
  • Net outflows from HKD are both endogenous and exogenous to rate differentials.
  • The exogenous component is not persistent or large.
  • Expect moderate FX intervention or realignment of rate differentials to January levels to stabilize USDHKD.

Key Contacts

Legal Disclaimer

• This document is non-independent research for UK FCA rules and is a marketing communication under MiFID II.
• It is not investment research and does not constitute an offer to sell or issue securities.
• Information is based on public sources and may be subject to rapid change.
• BNPP may have conflicts of interest and may engage in transactions inconsistent with the views expressed.
• The document does not constitute a prospectus or public offering and may not be used for investment decisions without proper legal and financial advice.
• All information and opinions are subject to change and not guaranteed in accuracy or completeness.
• The document is confidential and may not be distributed without prior written consent.

Additional Disclosures

• Options and ETFs: These are complex instruments with high risk. BNPP may have conflicts of interest and may act as an Authorized Participant or market maker.
• Restricted Securities: Certain securities may not be registered under US law and are only available to Qualified Institutional Buyers or non-US persons.
• Distribution: The report may be distributed to US persons by BNPP Securities Corp or its affiliates, subject to specific regulations.
• Legal Notice: The document is prepared by BNPP group companies and is for the use of intended recipients only. No liability is accepted for any losses arising from reliance on the document.

Conclusion

The report provides a detailed analysis of EM market dynamics, focusing on key economic data, central bank policies, and currency trends across the US, CEEMEA, Latam, and Asia. It highlights the potential for currency movements based on inflation data and policy expectations, while also cautioning against overreactions in the market. The document serves as a strategic guide for investors, with a focus on risk management and market positioning.