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EM Strategy Summary - 8 September 2017

Core Content Overview

This document provides a comprehensive summary of the Emerging Markets (EM) strategy for the week of 8 September 2017, focusing on key themes and trade recommendations across Asia, CEEMEA, and Latin America (Latam). It includes insights on FX, interest rates, and market dynamics, along with an outlook for upcoming economic data and central bank decisions.

Main Themes and Key Insights

China: Trade with the Trend

• RMB Appreciation: The PBoC appears to accept the current RMB appreciation against the USD and other currencies. Corporates are expected to continue selling USDCNY.
• NDIRS Rate: The NDIRS rate is expected to rise, but the team is waiting for a lower level to position for the trade.
• Shantytown Renovation Monetisation: This project has supported property market growth in third and fourth tier cities, keeping the total property market stable in 2017.
• FX Dynamics: The RMB index has risen to 95.20, similar to levels seen in late 2016. The PBoC has not intervened to curb RMB appreciation.
• Funding Costs: The 3-month USDCNH CCS remains at 3.2%, while onshore NCD yields have increased to 4.6%. The carry between NCD and CNH CCS is expected to remain attractive but not reach the 2014 levels.
• Market-Driven Fixing: The RMB fixing mechanism is becoming more market-driven, with reduced impact of the previous day's close due to the counter-cyclical factor.

South Africa - Turkey: Add to Long TRYZAR Trade

• TRY Appreciation: The TRY is expected to appreciate against the ZAR due to the significant inflation gap and the central bank's credibility.
• Inflation Outlook: Turkey's inflation is expected to decline in the medium term, while South Africa's inflation is already lower, leading to a narrowing rate differential.
• Trade Details: The team has increased their long TRYZAR position by USD 10mn. The target is 3.88, with a stop at 3.70.

Chile: Local Equities on the Rise

• Pension Fund Allocation: The shift in pension fund allocation towards riskier funds has not been a key driver of the peso's performance.
• Monetary Policy: The BCCh is expected to keep policy on hold until the end of the year, with the curve still pricing in potential rate cuts.

Peru: Foreign Holdings Increase

• FX Appreciation: The PEN has appreciated against the USD, prompting the BCRP to intervene in the FX market.
• Foreign Holdings: Overseas investors' share of Peruvian local-currency debt increased to 49% in July 2017 from 47.6% in June.

Brazil: IR/DI Strategy - Double-Digit Rates, Receive 'Em While You Can!

• DI Receivers Extended: The team has extended the targets for DI Jan25 and DI Jan20sJan21s FRA receivers due to the high risk premium in the curve.
• BRL Relative Value Trade: The team remains long BRL in a relative value trade against a basket of currencies (CLP, EUR, AUD).
• FX Swaps: The BCB has not yet started to roll over USD 10bn in FX swaps maturing in October.

Key Trade Recommendations

Key Market Events

Asia

• Economic Data:
  • Singapore's July retail sales data on Tuesday.
  • China's August industrial production and money supply data on Thursday.
  • India's CPI data on Tuesday, which could influence RBI rate decisions.
• FX and Rates:
  • RMB index has risen to 95.20, indicating appreciation against non-USD currencies.
  • The PBoC has not intervened to curb RMB appreciation.
  • The repo rate has dropped from 6.00% to 3.86% since late August.

CEEMEA

• Inflation Data:
  • Czech Republic and Poland will release August inflation data.
  • The Czech Republic's data may influence the market's view on potential rate hikes.
• Central Bank Meetings:
  • Turkey and Russia will hold their monetary policy meetings.
  • The PBoC is expected to keep liquidity tight until the end of the year.
  • The Russian Central Bank may consider a 50bp rate cut due to low inflation and stable RUB.

Latam

• Chile:
  • The BCCh is expected to keep policy on hold, with the curve still pricing in potential rate cuts.
• Brazil:
  • The government has approved a revamp of the TLP, leading to a rally in domestic risk assets.
  • The social security reform is a key legislative task, and the market has not fully priced this in.
  • The BCB has not yet started rolling over USD 10bn in FX swaps maturing in October.

Summary of Positions

• Rates:
  • Closed the PLN 2y5y flattener position with a profit of +13bp.
  • Extended targets for Brazil DI Jan25 and DI Jan20sJan21s FRA receivers.
• FX:
  • Increased long TRYZAR position.
  • Sold USDCNY, USDARS, and USDCOP NDFs.
  • Long BRL against a basket of currencies.
• Options:
  • Bought USDINR and EURTRY puts, USDHKD call spreads, and USDMXN/USDBRL options.
• Credit:
  • Bought Ghana and Turkey '30s and '45s, respectively.

Total P/L Summary

This document highlights the EM Strategy team's focus on rate differentials, FX dynamics, and market-driven movements, with a clear emphasis on capitalising on opportunities in China, Turkey, and Brazil.