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EM Strategy Summary - 3 February 2017

Core Content

This document outlines the EM Strategy team's recommendations and market outlook for the week of 3 February 2017. It is produced by BNP Paribas and Turk Ekonomi Bank A.S., with contributions from several strategists across different regions. The summary includes insights on currency manipulation, FX and interest rate strategies, credit recommendations, and market data for various emerging markets.

Main Themes and Recommendations

Currency Manipulator Label

• The Trump administration may focus on bilateral trade balance rather than other traditional criteria for labeling countries as currency manipulators.
• Most Asian countries, especially China, are likely to be identified as manipulators.
• In the short term, the label may reverse USD hoarding and lead to RMB and other Asian FX strength.
• In the medium term, outcomes depend on whether the US and China can reach a deal or if tensions escalate through unilateral actions.

EM Strategy Recommendations

• South Africa: Buy a 2m USDZAR call spread as the rate differential has narrowed and FX volatility has decreased.
• Turkey: Expect TRY to reverse its underperformance due to the CBRT's tight policy stance. Recommend buying a EURTRY 1m put and selling an equal amount of put at 3.90 and call at 4.15.
• GCC Sovereign Credit: Anticipate new Kuwait Eurobonds, with fair value expected to be flat to Abu Dhabi. Suggest switching from Saudi Arabia $ '46s into Qatar $ '46s due to the latter's stronger credit profile.
• Colombia: Recommend a tactical 1-3y IBR flattener due to the high positive carry and the divergence between market and model values.
• Mexico: Adjust the option strategy to capture the peso's rise. Take profit on the 5y5y TIIE receiver and short USDMXN forward.

Key Information

New Recommendations

Trade Review

Total P/L Summary

Key Insights

• China's RMB: May strengthen if the 'currency manipulator' label is applied, as USD hoarding could reverse.
• South Africa: ZAR appreciation has slowed due to narrowing rate spreads and inflation surprises. A 2m USDZAR call spread is recommended.
• Turkey: TRY is expected to reverse underperformance due to the CBRT's tight policy stance. A EURTRY 1m put spread is recommended.
• GCC Sovereign Credit: Kuwait is expected to issue Eurobonds, with fair value flat to Abu Dhabi. A switch from Saudi Arabia $ '46s into Qatar $ '46s is advised.
• Colombia: A 1-3y IBR flattener is recommended due to a high positive carry.
• Mexico: The peso remains attractive, with a re-shaped option strategy to capture its rise.

Market Outlook

• Asia: China's economic data and the RBI's policy meeting are key events.
• CEEMEA: Focus on CPI data, industrial production, and inflation forecasts.
• Latam: Mexico's CPI and central bank meeting are critical for the market outlook.

This summary provides a structured overview of the EM Strategy team's current recommendations and insights for the week of 3 February 2017.