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EM Strategy Summary - 09 February 2018

Core Content Overview

This document outlines the Emerging Markets (EM) strategy insights for 09 February 2018, focusing on key developments in EM currencies, interest rates, and market dynamics. It is produced by BNP Paribas's EM research and strategy teams across multiple locations, including London, Sao Paulo, and Singapore.

Main Market Highlights

Risk Assets and EM Flows

• Risk assets, including commodities, Asian equities, credit, and FX, continued to decline.
• EM hard currency debt funds experienced outflows over the past week.
• Local currency debt funds still saw inflows, but overall EM flows were negative.
• This was the worst flow week of the year, but the context of highly volatile Developed Markets mitigates the severity of the impact.

Russian Central Bank Policy

• The Central Bank of Russia (CBR) is expected to cut interest rates by 25-50 basis points (bps), from the current 7.75%.
• Inflation data showed a year-over-year rate of 2.2%, below expectations and the CBR's target.
• Despite the need for a larger rate cut due to inflation underperformance, the CBR may opt for a 25bp cut due to RUB volatility.
• USDRUB is expected to trade below the forward path, but the CBR's FX reserve interventions and the Ministry of Finance's USD purchases may prevent nominal appreciation.

Czech Republic Central Bank

• The Czech National Bank (CNB) raised rates by 25bps to 0.75%, as expected.
• The CNB adopted a more dovish tone, lowering the 2019 PRIBOR forecast to 1.7%.
• EURCZK forecasts suggest a slowdown in the downward trend to avoid undershooting the inflation target.
• This is expected to moderate the pace of koruna gains.

Chinese Market Insights

• January CPI for China was at 1.5%, indicating subdued inflation.
• The RMB has appreciated 5% against the USD in the last three months, the fastest pace on record.
• The RMB has outperformed the CFETS trade-weighted index, suggesting potential overvaluation.
• The appreciation may be due to herding behavior in corporate flows.
• Correction in RMB strength is expected in the next one or two months.
• Bank stocks in China have outperformed other sectors YTD, despite negative sentiment.
• The official NPL ratio peaked at 1.8% in Q3 2016, indicating improved asset quality in the banking sector.

FX Positioning and Market Outlook

• FX positioning indicators showed short USD Asia positions were at a 3-year high before the correction.
• Since the correction, there has been a significant reduction, though net positions remain short USD.
• Surviving positions are concentrated in SGD, IDR, and MYR.
• The market appears long USD vs. KRW and PHP, and flat vs. INR.
• Short USD IDR positions have been exited.

Ratings Outlook

• Angola (S&P), Czech Republic (Fitch), Latvia (Moody's), and Qatar (S&P) will be rated today.
• Outlooks:
  • Angola: Stable
  • Czech Republic: Positive
  • Latvia: Stable
  • Qatar: Negative

Strategy Contacts

Legal and Regulatory Information

• This document is non-independent research and may be subject to conflicts of interest.
• It is a marketing communication and not investment research for MiFID II.
• It does not constitute an offer to sell or issue securities, nor is it a solicitation to buy.
• No liability is accepted for any losses arising from reliance on the document.
• The document may include simulated performance data, which is not indicative of future results.
• It contains no investment, financial, legal, or tax advice.
• It is intended for professional clients and eligible counterparties only.
• Information is confidential and may not be distributed without prior written consent.

US Disclosures

• Options and ETFs discussed are complex and may involve significant risk.
• Certain securities may be "restricted" and only available to Qualified Institutional Buyers (QIBs) or non-US persons.
• BNPP Securities Corp. (BNPPSC) is responsible for distribution to U.S. persons.
• BNPPSC is registered with SEC, CFTC, FINRA, and NFA.
• The document is a general solicitation of derivatives business under U.S. law.

UK and France Disclosures

• In the UK, the document is communicated by BNP Paribas London Branch, authorized and regulated by the ECB, ACPR, and FCA.
• In France, the report is produced and distributed by BNPP SA and BNPP Arbitrage, both supervised by ACPR and AMF.
• BNPP London Branch is incorporated in France and registered in England and Wales.