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EM Strategy Summary – 17 March 2017

Core Content

This document provides a weekly summary of Emerging Market (EM) strategy recommendations and market analysis from the EM Strategy Team at BNP Paribas, including insights from various regional strategists.

Main Themes of the Week

Hong Kong: Carpe diem!

• The cross-currency basis in USDHKD has widened sharply, suggesting a revaluation of the HKD.
• FX forwards are pricing in a HKD revaluation, but the likelihood of a break of the USD peg is extremely low.
• A quasi-arbitrage opportunity exists through FX options.
• Recommended strategy: Buy 1y USDHKD call spread with strike 7.70/7.80, costing 420 HKD pips. Breakeven is at 7.7420, which is 80 pips below the peg band.
• Potential gains: Minimum 80 pips, maximum 580 pips, equivalent to 20%–140% returns on equity.
• Risk: If HKD revalues, the call spread may expire worthless, limiting losses to the premium paid.

SG-USD Spreads: Time to take profit

• The receive 5y5y SGD versus USD IRS recommendation has performed well.
• Profit taken at current level (28bp), with a net profit of 27bp.
• Re-entry considered if the spread widens significantly.
• Drivers of spread compression: End of MAS easing cycle, deleveraging, liquidity, and cheap USD funding.

Turkey: The CBRT tightens policy

• CBRT increased the late liquidity window (LLW) rate by 75bp to 11.75%, and raised the swap auction rate to 11.75%.
• The average repo funding rate rose to 11.35%.
• TRY has outperformed EM peers this week but remains 2% weaker than mid-February levels and 6% weaker year-to-date.
• Relative value index suggests further recovery potential.

Latam FX: Reinforcing bullish strategy on Mexico; increasing long position

• MXN is the most undervalued currency in Latin America.
• Positive comments from the US trade adviser and new FX intervention tools support the MXN's strengthening.
• Recommended strategy: Increase long USDMXN 12-month forward position to USD 15mn, with entry at 20.525 and spot reference at 19.49.
• Target and stop loss remain unchanged.

Colombia: Local Debt Monthly Monitor – February 2017

• Non-residents’ holdings of Colombian local public debt increased to COP 58.6trn (USD 20bn) in February, but their relative share fell from 24.7% to 24.4%.
• Commercial banks and pension funds increased their holdings more significantly.
• Non-residents' debt holdings represent 42.6% of international reserves.

Key Recommendations

Trade Review

• Asia: Profit taken on SGD-USD IRS trade (28bp), with a net profit of 27bp. Consider re-entry if spread widens.
• CEEMEA: No new trade recommendations. Continued recommendation to pay the 1y1y xccy in Russia.
• Latam: Increased USDMXN 12-month forward and IBR 1s3s flattener positions. Extended stop-loss on Di Jan18sJan20s flattener.

What's Up Next Week?

Asia

• No major domestic events.
• Central banks of the Philippines and Taiwan will meet on Thursday, likely keeping policy on hold.
• Markets will follow global risk appetite and US rate trends.

CEEMEA

• Key event: CBRT policy meeting on Friday (24 March). Expected to keep liquidity tight.
• Continued recommendation to pay the 1y1y xccy in Russia.
• Inflation expectations remain high, and the CBRT is likely to keep rates on hold.

Latam

• Brazil: Mid-month inflation report on Wednesday may confirm downward trend, supporting rate cuts at COPOM meeting.
• Mexico: Inflation release on Thursday, with 30bp of rate hikes priced in. Continue short USDMXN 12-month forward.
• Colombia: Expected to cut policy rates by 25bp at its meeting on Friday (24 March). Increased 1s3s flattener position.

Market Opportunities

• Quasi-arbitrage opportunities in HKD and SG-USD spreads.
• Potential for further MXN appreciation supported by US trade comments and FX tools.
• Colombia's debt market shows continued foreign participation, with non-residents holding 42.6% of international reserves.

Summary

The EM Strategy team highlights several key market opportunities and trade recommendations, focusing on FX and interest rate strategies across Asia, CEEMEA, and Latin America. The HKD is seen as undervalued with limited risk of de-pegging, while the TRY has shown recovery but still has room to strengthen. In Mexico, a bullish stance is reinforced by supportive comments from the US trade adviser and new FX intervention tools. Colombia's debt market continues to attract foreign investors, and the team recommends maintaining a 1s3s flattener position. Overall, the team is closing some profitable trades and increasing positions in other areas where fundamentals suggest further appreciation.