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EM STRATEGY DAILY - 20 July 2018 Summary

Core Content Overview

This document provides a summary of the Emerging Markets (EM) strategy outlook for the week of 20 July 2018, covering key developments in FX and interest rate markets across various regions, including Asia, Latin America, and CEEMEA (Central and Eastern Europe, Middle East, and Eastern Europe). It also includes investment recommendations and regulatory disclosures.

Key Market Developments

China

• USDCNH Spike: The Chinese central bank weakened the daily fixing of the yuan, leading to a sharp increase in the USDCNH exchange rate.
• RMB Outlook: The next key level for USDRMB is expected to be at 6.85, based on the assumption that the trade war with the US will end within 18 months.
• FX Forward Reserve Requirements: There is a possibility that the State Administration of Foreign Exchange (SAFE) may implement FX forward reserve requirements if the RMB continues to weaken.
• Exporter Behavior: High funding costs are likely to push exporters to sell their FX receipts.

Indonesia

• Policy Rate Hold: Bank Indonesia (BI) left its 7-day reverse repo rate unchanged at 5.25% after three previous rate hikes.
• Hawkish Stance: BI remains hawkish and is concerned about the IDR (Indonesian Rupiah).
• New Measures: BI introduced several measures to support the IDR, including the revival of certificates, increased firm hedging, and the launch of a new overnight benchmark rate.
• Potential Rate Hikes: There is a risk that BI may raise rates by an additional 50bps in 2H18, which could negatively impact GDP growth.

South Africa

• Policy Rate Hold: The South African Reserve Bank (SARB) held policy rates as expected.
• Inflation Forecast: The headline CPI forecast for 2018 was slightly lowered to 4.8%, while the 2019 forecast was raised to 5.6% and 2020 to 5.4%.
• FX Outlook: The ZAR is considered overvalued, and the fair value of the USDZAR pair is expected to rise.
• Cautious View: The SARB's slightly hawkish stance was not enough to prevent ZAR from selling in line with the USDCNH movement.

CEEMEA Region

• Currency Valuation: TRY, CZK, PLN, and HUF end-2018 forwards are considered undervalued compared to fair value.
• RUB Neutral: The RUB is viewed as neutral.
• Trade Disputes Risk: The region is vulnerable to trade disputes in the US, Europe, and China.
• Eurozone Slowdown: A more pronounced eurozone slowdown than the base case could be the biggest risk to CEEMEA growth.

Latin America

• Colombia: Food and gasoline prices could push inflation higher in H2 2018. A moderate El Niño could increase inflation by 20bps, mostly in 2019. However, near-term inflation is expected to remain low, allowing the Bank of Colombia (BanRep) to keep its policy rate expansionary.
• Investment Recommendation: Recommend receiving IBR 2y at 4.76% with a target of 4.46% and a stop loss of 5.16%.
• IBR Curve Analysis: The short end of the IBR curve is pricing in around 105bps of easing by the end of 2019, with a 75bps easing expected by 2Q19. The 2y tenor is 30bps above fair value, with significant carry and roll-down benefits.

Investment Recommendations

• Colombia:
  • IBR 2y: Recommended to receive at 4.76% with a target of 4.46% and stop loss at 5.16%.
  • Fair Value: The 2y tenor is 30bps above fair value.
• Argentina:
  • 2018 fiscal targets are likely to be beaten by a small margin.
  • Primary deficit in 1H18 reached ARS122.6bn, below the official target of ARS148bn.
  • Primary spending contracted by 5.6% y/y in real terms.

Contacts

Strategists

Production

Legal & Regulatory Disclosures

• The document is a marketing communication and not independent research.
• It does not constitute investment research under MiFID II.
• Non-independent research is intended for Professional Clients and Eligible Counterparties.
• Conflicts of Interest: BNPP may have financial interests in the issuers mentioned and may engage in transactions inconsistent with the views expressed.
• Confidentiality: The information is provided on a strictly confidential basis and may not be copied or distributed without prior consent.
• ETF & Options Disclosures: ETFs and options discussed are complex instruments with high risk and may not be suitable for all investors.
• US Securities Law: Certain securities discussed may not be registered under US law and are restricted to Qualified Institutional Buyers (QIBs) or non-US persons.