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EM Strategy Plus Summary

Core Content

This report provides an analysis of emerging market (EM) strategies and market outlooks, focusing on Central and Eastern Europe (CEE), Asia, and Latin America (Latam). It outlines key recommendations for trading based on current market conditions, economic ties, and event risks, particularly in the context of the UK's EU referendum.

Main Themes and Key Information

Event Risk and Focus on CEE

• Global financial markets remain turbulent and are expected to stay so ahead of the UK's EU referendum on 23 June.
• CEE assets have underperformed due to their close economic ties with the UK and political uncertainty.
• CEE countries benefit from high global liquidity and reduced near-term RMB devaluation risks.
• The underperformance is linked to uncertainty in trade flows, remittances, and future EU budget payments.
• CEE currencies have generally underperformed other EM FX, with FX volatility rising in some cases.

Economic Exposure to the UK & EU Budget

Asian FX: Get Set for a Break

• Asian USD pairs have been in ranges for several months and are setting up for a break to the downside.
• USDJPY has historically led large trend moves in Asian FX.
• The stalled USD bull market and political risks in the eurozone are making Asian currencies more appealing as a store of value.
• The RMB has depreciated steadily against its policy basket, reducing the risk of a large devaluation.
• Asian FX indices have been in a range since September 2015, and the market is showing signs of potential downside moves.
• Speculative positioning is absent, with FX positioning indicators showing a neutral bias.

Asia: Sell SGD NEER Proxy

• The SGD NEER is trading 0.8% above the mid-point of the band.
• Once the safe haven bid is gone, SGD NEER is likely to revert to the middle of the band.
• The Monetary Authority of Singapore (MAS) is unlikely to shift to a tightening bias.
• Recommendation: Sell SGD versus the narrow basket at current levels in 6m forwards with a 1% stop and 1.5% target.

South Africa: Normalisation is Cheap

• South Africa has been one of the most volatile FX markets due to its reliance on global portfolio flows.
• Buy 2m ZAR put spread: Buy 1x USDZAR at 14.50, sell 2x USDZAR at 13.75, for 0.65% of notional with a maximum payout of 3.8% at 13.75.
• The ZAR has been affected by disappointing data and a risk-off environment.
• The South African CPI will be released on 22 June.

Turkey: 50bp Cut Already Priced In

• A 50bp rate cut is priced in for the coming week, but it is unlikely to have a significant impact on rates or the TRY.
• A smaller cut would lead to a flattening of the curve and strengthening of the TRY, but we believe this is very unlikely.
• The CBRT is likely to continue easing monetary policy in the absence of a substantial sell-off of the currency.

Brazil: Local USD Rates at Considerably High Levels

• The entire term structure of the local USD curve is now considerably above the model's error bands.
• An adjustment to the downside is the most plausible scenario.
• The Central Bank of Brazil is expected to wait for confirmation of a fall in inflation expectations and a consistent move of the headline CPI rate towards the 4.5% target before cutting rates by 25bp in August.

New Recommendations

Trade Review

Total P/L: 1223, Rates: -218, FX: 322, Options: 945, Credit: 174

Key Insights

• The UK EU referendum is a major source of uncertainty, affecting CEE assets.
• Asian currencies may benefit from a shift in global risk sentiment.
• The RMB's depreciation has reduced the risk of a large devaluation.
• Speculative positioning in FX markets is currently neutral.
• South Africa and Brazil are highlighted for their FX and rate dynamics.
• The report recommends several put spreads and put flies in key EM currencies.