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EM STRATEGY | GLOBAL WEEKLY - 24 February 2017 Summary

Core Content

This document provides a comprehensive overview of Emerging Market (EM) strategy insights from the BNP Paribas EM Strategy Team and Turk Ekonomi Bank A.S. It outlines the current state of EM assets, including FX, credit, and interest rates, and highlights key themes, new trades, and upcoming market events.

Main Viewpoints

• EM Assets Rally Potential: EM assets, especially EM FX, have shown strong performance since January, driven by historical cheapness, a strengthening EM economic environment, carry against negative US real rates, seasonal factors, and strong inflows. However, caution is advised as the May Fed meeting approaches.
• Thailand: Carry Haven: The Bank of Thailand (BoT) is expected to keep policy rates on hold due to concerns over currency strength and potential 'currency manipulation' labels. Carry/roll metrics are moderately attractive, and the team recommends a receiver position in 2y1y Thai NDIRS.
• Asia: Basis Opportunities: Cross-currency basis have widened sharply in South Korea and Taiwan, with front-end USD ASW at attractive levels. Fixed income investors with access to local markets can benefit from this, particularly in KRW and TWD.
• Turkey: Steepening Ahead: The TRY has shown improvement, but remains weaker than the EM basket. The team recommends a 1v5 xccy steepener in 3m forwards, with a target of 0bp and a stop loss at -46bp.
• Mexico: FX Intervention Program: The new FX intervention program, which settles in local currency, is expected to support the MXN's rise towards its fundamental value.
• Brazil: Public Debt Monitor: Non-residents' share of total public debt fell to 14.22%, equivalent to only 35.4% of international reserves. The team recommends flattening the DI Jan18sJan20s curve.
• Latam: New FX Positions: The team increased its long USDMXN April 2017 put spread due to the improved outlook for the MXN.

Key Information

• New Recommendations:

  • Receive 2y1y Thai NDIRS: PV01/notional of 5K USD, entry level 2.24%, target 2.00%, stop 2.50%.
  • TRY 1v5 xccy steepener (3m forward start): PV01/notional of 10k USD, entry level -33bp, target 0bp, stop -46bp.

• Performance Overview:

  • EM Exports and Confidence: EM export growth and business confidence have surged, with notable performance in Indonesia, Singapore, Taiwan, South Africa, and Brazil. Commodity price increases are a key factor in this improvement.
  • US Real Yields: US real yields remain low, with front-end rates in deep negative territory, supporting EM asset inflows.
  • Seasonality: EM FX and credit tend to perform well in February, March, and April, with a stronger trend in the second half of the year. Brazil's DI curve is currently pricing in 275bp in further cuts until the end of the year.

Upcoming Events

• Global:

  • US President's address to Congress on Tuesday.
  • Fed Chair Yellen's speech in Chicago on Friday.
  • These events could influence dollar strength and EM flows.

• Asia:

  • Malaysia's monetary policy meeting on Thursday.
  • India's Q4 2016 GDP report on Tuesday.
  • The data could lead to two-way risks due to the impact of demonetisation.

• CEEMEA:

  • South Africa's National Budget on 22 February.
  • Hungary's central bank policy meeting on Tuesday.
  • January's private sector credit growth data on Tuesday.
  • Poland's manufacturing PMI on Wednesday.

• Latam:

  • Brazil's monetary policy meeting minutes on Thursday.
  • Colombia's February CPI on 4 March.
  • Chile and Mexico's policy meeting minutes and inflation reports on Wednesday.

Conclusion

The EM Strategy Team remains optimistic about the short-term performance of EM assets, driven by strong export growth, improving economic conditions, and low US real yields. However, they caution against overexposure as the May Fed meeting approaches. The team recommends a mix of receiver and steepener positions across various EM currencies and markets, with a focus on carry and roll dynamics, as well as basis opportunities in local markets.