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EM Strategy Summary - 3 March 2017

Core Content

This document provides a comprehensive overview of Emerging Market (EM) strategies and outlooks for the week of 3 March 2017, authored by the BNP Paribas EM Strategy Team, including insights from various regional experts.

Main Themes

China: Brace for Tightening Post NPC

• The People's Bank of China (PBoC) is expected to implement further policy tightening following the National People's Congress (NPC) meeting, which concludes on 13 March.
• The recent modification of the USDCNY fixing is considered more technical than strategic, aiming to reduce the impact of USD fluctuations on the RMB index.
• The PBoC has already raised short-term policy rates by 10bp and may do so again in March or April.
• The PBoC's monetary policy is described as "prudent and neutral", but the shift towards tightening is evident through its actions on liquidity and credit growth.
• The yield on China's 10y government bond has increased by 32bp year-to-date, indicating a tightening cycle.
• The PBoC is expected to manage capital outflow pressure by maintaining higher interest rates and managing the USD-China rate spread.

China: Is It Time to Pay CNH FX Swap?

• USDCNH forwards have compressed significantly over the past two months, with the 3m points declining to +540 from over +1600.
• The spread between onshore and CNH forward outrights has compressed to 765pips, close to its tightest level since October 2016.
• The PBoC has allowed more liquidity to return to the CNH market, as seen in the recovery of RMB net outflows in January 2017.
• While paying CNH forwards is considered a viable strategy, it should be done cautiously due to potential for further compression.
• The current forward points may be adequate if the USD does not strengthen significantly, but if it does, the premium may not be sufficient.
• The team recommends entering at close to +1400 for the 3X12 forward.

CEEMEA: 2014 Remix?

• The current US real yield curve resembles that of H1 2014, when the Fed began signaling rate hikes after QE.
• The initial reaction to US rate hikes may mirror 2014, but EM performance is expected to differ.
• Turkey is identified as the most exposed to US rate hikes, both nominal and real.
• The Turkish Treasury is set to issue TRY 14bn in bonds, likely to put downward pressure on bond prices.
• The Turkish banking regulator has lowered risk weightings for FX reserves, which could offset the negative impact of the Fitch downgrade.

Latam: Market Outlook

• In Brazil, industrial production data and February inflation are key focus points. Industrial production is expected to contract monthly but expand year-on-year, signaling potential economic recovery.
• The Brazilian Central Bank may decide to roll over USD swaps maturing in April 2017, which could influence BRL performance.
• In Mexico, the first auction of USD 1.0bn in NDF instruments is expected to take place on 6 March 2017, with potential impacts on MXN.
• The Mexican peso is viewed as undervalued, and the team recommends going short USDMXN March 2018 forward at 20.77.

Key Recommendations

FX

• Short USDMXN via 12m forward at 20.77 with a stop at 21.40.
• Sell 3m SGDCNH outright at 4.891.
• Long USDARS 2y NDF against short USDARS 1y NDF at 22,000.
• Short CLPCOP via 1m NDF at 4.516.
• Short CADCOP via 1m NDF at 2,222.
• Long BRL against a basket (CLP, EUR & AUD) via 1m NDF at 192.74/4.018/2.6285.

Rates

• Receive 2Y1Y THB NDIRS at 2.24%.
• Pay 1Y1Y RUB XCCY at 7.23%.
• Receive 5Y5Y SGD IRS vs. pay 5Y KRW IRS at 0.96%.
• Flattening Colombia IBR 1y-3y at -63.
• Flattening Brazil DI Jan18sJan20s at -43.

Options

• Buy at 13.25 1xUSDZAR 2m call k=13.75, sell 1.5xUSDZAR 2m call k=14.20.
• Buy EURTRY 1m put at 4.01 and sell put at 3.90 and call at 4.15 (expired, with a profit of 1.72%).

Credit

• Switch from Saudi Arabia $'46s into Qatar $'46s at -16bp.

Key Events for Next Week

Asia

• Monthly FX reserve data releases for most Asian countries.
• Chinese New Year distortions may affect trade data, but the NPC meeting will focus on financial targets for 2017, including GDP growth and M2 growth.

CEEMEA

• CPI data for Hungary, the Czech Republic, and Russia on Wednesday, Thursday, and Friday, respectively.
• Poland's central bank policy meeting on Wednesday, where rates are expected to remain at 1.50%.
• South Africa's GDP data on Tuesday, expected to show modest improvement from Q3 2016.

Latam

• Mexico's first auction of NDF instruments on Monday.
• Brazil's industrial production and February inflation data releases.
• Possible decision by the Brazilian Central Bank on FX swap rollover.

Conclusion

The document highlights the evolving dynamics in EM markets, emphasizing the PBoC's tightening stance, the potential for CNH FX swap compression, and the varying degrees of exposure among CEEMEA and Latam countries to US rate hikes. It also outlines key strategies and market outlooks for the coming week, with a focus on FX, rates, and credit instruments.