20170714-法国巴黎银行-EM_Strategy_Desknote_11页_478kb

EM Strategy Desknote Summary

Core Content

This document provides an analysis of inflation trends and their implications for real interest rates and central bank policy in South Africa, Turkey, and Russia. It outlines current market conditions, inflation expectations, and strategic trading positions for investors in the CEEMEA (Central and Eastern Europe, the Middle East, and Eastern Europe) region. The focus is on how local inflation dynamics affect currency and interest rate movements, and how investors can position themselves accordingly.

Main Views and Key Information

1. US Fed and Inflation Dynamics

• Janet Yellen's testimony broke the two-week-long drawdown in USTs and Bunds, signaling a shift in the bearish momentum for rates.
• The US CPI inflation print reinforced this break, suggesting a potential end to the rate sell-off.
• The document shifts focus from global rate trends to local inflation paths, as the previous sell-off momentum has been lost.

2. Turkey: Inflation and Policy Outlook

• Inflation in Turkey has peaked, with CPI at around 12% y/y in April 2017, and is expected to decline to 8% by the end of Q1 2018.
• The TRY xccy curve is currently pricing in a linear easing of liquidity, but the authors believe that the curve should price more rate cuts after six months.
• The 1y2y TRY steepener at -44bp is recommended, targeting 0bp with a carry of -13bp per 3 months.
• The curve is pricing in a 150bp reduction in the cost of TRY liquidity over two years, but the authors think this is too optimistic for the near term.
• The 1y forward rate is at 7.38%, targeting 6.80%, with a stop loss at 7.60%.
• Inflation is expected to remain sticky in Q3 2017, keeping the Central Bank of Turkey (CBT) from easing liquidity.
• The 2y pivot point in the TRY xccy curve is a key area for hedging, with the curve pricing a linear easing, which may not materialize quickly.

3. South Africa: Inflation and Policy Outlook

• South African CPI is within the SARB's target range, while long-term inflation expectations are approaching the target.
• The authors expect CPI to ease by around 100bp over the next two months, with an additional 50bp by the end of the year.
• The 2y2y FWD at 7.38% is recommended, with a positive carry of 9bp over 3 months, targeting 6.80%.
• The SARB is expected to begin its easing process in September, with the first rate cut likely to be delivered in line with market expectations.
• The 9x12 FRA at 6.88% is pricing JIBAR significantly lower than its current fixing at 7.34%, indicating potential rate cuts.
• The authors recommend a flattener for the 3x6 and 12x15 FRA curves, as the negative carry is not a major issue due to the expected drop in inflation.

4. Russia: Rate Cut Expectations and Positioning

• The xccy curve in Russia is pricing in roughly 25-30bp cuts every quarter, with a terminal rate around 6%.
• The authors have closed their 6x9 and 1y1y xccy payers, securing profits of 65bp and 40bp respectively.
• Commodity price declines are expected to help reaccelerate the deflation process in Q4 2017, but the CBR is likely to slow the pace of rate cuts.
• The authors suggest taking profit on xccy payers, as rate cut expectations have returned.

Key Charts and Data

• Chart 1: TRY xccy curve insufficiently prices rate cuts beyond 6 months.
• Chart 2: TRY xccy 1y2y spread at -44bp, close to 2015 lows.
• Chart 3: External prices for Turkey measured by an index of commodity prices rose by ~70% y/y at their peak.
• Chart 4: External inflationary pressures have swung significantly over the past five months.
• Chart 5: 2y pivot point in TRY xccy curve.
• Chart 6: Spot inflation and 10y breakevens in Turkey remain well above target.
• Chart 7: South African spot inflation within target range; 10y breakevens close to upper bound.
• Chart 8: Cumulative decline in South African inflation over the next two months.

Inflation Trends Table

Strategic Recommendations

• Turkey:

  • Take profit on RUB xccy payers.
  • Receive 10k DV01 1y2y TRY steepener at -44bp, targeting 0bp.
  • Consider 1y EURTRY put option or 1y2y steepener to avoid negative carry.
  • Position for a steeper curve via 1y2y steepener if inflation drops in July.

• South Africa:

  • Position for a steeper curve via 2y2y FWD at 7.38%, targeting 6.80%.
  • Avoid negative carry by staying in the part of the curve where carry is positive.
  • Recommend a 1y2y steepener as a better option than 6m forwards.
  • Consider a USDZAR call spread if developed market central banks resume hawkish tone or inflation remains high.

• Russia:

  • Take profit on xccy payers, as rate cut expectations have returned.
  • Close 6x9 and 1y1y xccy payers for profits of 65bp and 40bp.
  • Recommend receiving 2y2y at 7.38% for potential rate cuts.

Contacts

• Emerging Markets Strategy Contacts:

  • Wike Groenenberg: Head of Emerging Markets Research, CEEMEA & APAC
  • Marcelo Carvalho: Head of Emerging Markets Research, Latam
  • Piotr Chwieczak: FX & IR CEEMEA Strategist
  • Erkin Isik, CFA: FX & IR CEEMEA Strategist
  • Sai Ulluri: CEEMEA Graduate
  • Andrew MacFarlane, CFA: Credit CEEMEA Strategist
  • Mirza Baig: Head of FX & IR Asia Strategy
  • Altaz Daghia: AU/NZ IR Strategist
  • Dawn Kwa: Asia Graduate
  • Kun Shan: China Strategist
  • Tianhe Ji: China Strategist
  • Gabriel Gersztein: Head FX & IR Latam Strategy
  • Samuel Castro: FX & IR Latam Strategist
  • Gustavo Mendonca: FX & IR Latam Strategist

• Production and Distribution:

  • Barbara Consuelo, Amanda Grantham-Hill, and Anna McLauchlin are responsible for the production and distribution of this document.

Legal Notice

• This document is a marketing communication and not investment research.
• It is intended for Professional Clients and Eligible Counterparties as defined by MiFID.
• BNP Paribas may have a financial interest in the issuers mentioned.
• The information and opinions are subject to change and not guaranteed.
• Indicative prices are not actual transaction terms and are based on internal models and assumptions.
• No liability is accepted for any use of the information or reliance on it.