20160916-法国巴黎银行-EM_Strategy_Plus_42页_5mb

EM Strategy Plus - 16 September 2016

Core Content

The document outlines the current market outlook and investment recommendations for Emerging Markets (EM) ahead of the Bank of Japan (BoJ) and US Federal Reserve (Fed) policy meetings on 21 September 2016. It highlights the steepening of bond yield curves in developed markets, which is influencing EM strategies. The analysis includes FX positioning, credit trades, and options strategies, with a focus on the CLEER™ model for Asian currencies.

Main Themes

1. Yield Curve Steepening and EM Strategy Adjustments

• Bond yield curves in developed markets have steepened ahead of the BoJ and Fed meetings, signaling a shift in monetary policy expectations.
• Due to stretched valuations and uncertainty around the policy outcomes, BNP Paribas has reduced long EM rates recommendations.
• A short TRY position was introduced through options, and short SGDCNH, USDBRL call spread, and various African relative value credit trades were recommended.

2. Asian FX Positioning

• BNP Paribas has introduced the CLEER™ model to assess the fair value of EM Asian currencies.
• The model suggests that SGD and PHP are relatively expensive, while the RMB has scope to depreciate and the MYR is modestly undervalued.
• The bank has switched from a long USDSGD position to a short SGD vs CNH recommendation, as CNH forwards have spiked.
• The USD/Asia speculative positioning has turned slightly long, with the market scrambling to cover short USD positions and chasing upward momentum.

3. African Credit Update

• Sub-Saharan African credit markets are showing positive potential, with BNP Paribas turning positive on Ghana and Kenya.
• Despite the overall positive outlook, the bank advises caution due to country-specific risks.
• The bank recommends switching allocations from Senegal and Zambia to Kenya and Ghana.

4. Fed/BoJ Policy Divergence and Latam Impact

• The divergence in policy between the BoJ and the Fed is expected to create pressure on Latam assets.
• A rate hike by the Fed could further reduce the carry advantage of EM assets, especially those funded in USD.
• The bank recommends a USDBRL call spread trade (3.32/3.40, 1:1) to hedge against potential negative outcomes from the Fed and BoJ meetings.

Key Recommendations

Summary of Positions

• Interest Rates: Closed the 2y Thai NDIRS vs US IRS spread, took profit on the long USDSGD and short USDCNH straddle, and allowed USD puts spreads to expire.
• FX: Sold USDZAR, introduced a short SGD vs CNH trade, and recommended a USDBRL call spread.
• Options: Bought a 3m USDTRY call, 3m USDINR put spread, and 1m USDTRY call.
• Credit: Recommended switching from Senegal and Zambia to Kenya and Ghana, and from Brazil NTN-Bs to DI Jan19s.

Market Outlook

• The upcoming BoJ and Fed meetings are likely to cause a correction in EM assets, though not as severe as in 2013.
• The Fed's rate hike is expected to reduce the carry advantage, and the market's perceived probability of a rate hike has fallen to less than 20%.
• BNP Paribas remains cautiously long on EM rates, particularly in Brazil, where the impact of a US rate hike is expected to be limited due to wide interest rate spreads and local economic conditions.

CLEER™ Model for Asian FX

• The CLEER™ model is a proprietary medium-term fair value model based on cyclical economic fundamentals.
• It incorporates variables such as Purchasing Power Parity (PPP), business cycle, balance of payments (BoP), and terms of trade (ToT).
• The model is adapted for EM Asian currencies due to structural diversity and managed FX regimes, and is based on local economic data rather than shared experience.
• The model suggests that relative CPI, trade growth, and FX reserve changes are statistically significant drivers of exchange rates, while the ToT effect is counterintuitive for processing economies.

Conclusion

The document provides a comprehensive analysis of EM FX and credit markets, emphasizing the impact of central bank policy decisions on asset valuations. It outlines a strategic shift in positions, including the introduction of the CLEER™ model for Asian currencies, and recommends specific trades to capitalize on the expected yield curve steepening and policy divergence.