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EM Strategy Summary - 11 August 2017

Core Content

This document outlines the emerging markets (EM) strategy for the week of 11 August 2017, focusing on political risk, currency movements, interest rate dynamics, and credit positions across various regions. It is authored by the EM Strategy Team at BNP Paribas, including contributions from multiple branches and strategists.

Main Themes and Key Insights

Geopolitical Risk and Risk Premium

• Political risk in EM remains significant, with ongoing issues in North Korea, Venezuela, and South Africa.
• These geopolitical tensions justify a risk premium in certain EMs.
• South Africa: Political instability within the ANC, particularly around President Zuma, is expected to continue. The next major events are the ANC leadership election in December 2017 and the 2019 presidential election.
• Qatar: The diplomatic crisis has lasted three months with no resolution. Despite its wealth, the country may face challenges in maintaining credit quality due to reduced exposure from GCC investors.
• Brazil: Political risk premiums in the front part of the yield curve and currency remain high, but President Temer is expected to survive short-term challenges and push forward with reforms.

Currency and FX Strategy

• China: The EM Strategy team has taken profit on the long-standing short USDCNH trade. The RMB appreciation trend is not over but is overextended.
• South Africa and Turkey: A long TRY/ZAR trade has generated a 4.1% profit, and the team recommends taking partial profit and waiting for better entry levels.
• Turkey: The TRY currency is better positioned with high carry and low REER, despite rising bond yields. The team has taken profit on long TRY positions.
• Argentina: The team has adjusted the stop-loss for the long protection in 5y CDS against EM CDX ahead of the primary election on 13 August.
• Chile: The CLP/CAM curve has flattened due to higher inflation, suggesting a possible easing of FX pressure.
• Mexico: FX appreciation is expected to continue as the USD systemic risk and short end of the US rate curve remain key drivers. The TIE curve is being monitored for steepening.
• Colombia: Foreign participation in local debt has decreased slightly to 25.6% in July.

Interest Rate Strategy

• Brazil: The DI curve term premium is unusually high, supporting the Jan20sJan21s FRA receiver position.
• Poland: The 2s5s flattener trade has been closed with a 0% P/L.
• Korea: The KRW NDIRS trade has shown a -3 bp P/L.
• CNH CCS: The team has taken profit on the short USDCNH trade with a +25 bp return.
• USDCNY NDF: The team maintains a short USDCNY recommendation and expects a reversal in the appreciation trend.

Options Strategy

• USDINR put: A 3m ATMF put was bought with a 2.50% return.
• USDZAR call spread: An expired 1m call spread showed a -0.50% P/L.
• EURTRY put: A 1y ATM put was bought with a -0.67% P/L.
• USDINR strangle: A zero cost trade was initiated with a 2.50% return.
• USDHKD call spread: A 1y call spread was bought with a 0.46% return.
• USDBRL OT: A long OT position was taken with a -6.34% P/L.

Credit Strategy

• Ghana '30s: A buy recommendation was made on the Ghana '30s bond with a spread-over-swap basis.
• Turkey '45s: A buy recommendation was made on Turkey '45s with a -7 bp P/L.
• Turkey 5y CDS: A buy recommendation on Turkey 5y CDS with a -20 bp P/L.
• Argentina 5Y CDS vs EM CDX: A buy recommendation with a +9 bp P/L.

Key Events and Outlook

Asia

• Thailand: Central bank policy meeting on 16 August.
• India: CPI data on 14 August.
• Philippines: Overseas remittance numbers for June on 15 August.
• Singapore: Non-oil domestic export data on 17 August.
• China: Money supply data to be released between now and 15 August.

CEEMEA

• Czech Republic, Hungary, Poland: Preliminary Q2 GDP data on 16 August.
• South Africa: Retail sales growth expected to rise to 3.2% y/y in June.
• Egypt: Central bank policy meeting on 17 August.
• Turkey: Treasury issues 5y rent certificate and 7y FRN on 17-18 August.
• Turkey: CBRT releases Survey of Expectations for August.

Latam

• Chile: Central bank policy meeting on 17 August.
• Brazil: Retail sales and monthly activity data on 15 and 17 August.
• Mexico: First round of NAFTA negotiations on 16 August.
• Argentina: Primary election on 13 August.

Summary of Positions and Performance

Total P/L

• Total: +4935
• Rates: +1497
• FX: +2955
• Options: +522
• Credit: -39

Conclusion

The EM strategy team highlights the importance of political risk and its impact on currency and bond markets. They have taken profits on certain trades, adjusted stop-loss levels, and maintained positions in others based on macroeconomic and technical analysis. The outlook remains cautiously optimistic, with a focus on monitoring key economic indicators and political developments in the coming weeks.