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EM STRATEGY | GLOBAL WEEKLY - 22 June 2018

Core Content

This document provides an analysis of emerging market (EM) strategies and FX positioning for the week of 22 June 2018, compiled by BNP Paribas and other regional branches. It outlines the current market sentiment, trade positions, and upcoming events that could impact EM currencies and bonds.

Main Themes and Key Insights

Asian FX Positioning: Edging Shorter

• KRW: Investors have moved to a net short position, reflecting concerns over KRW vulnerability due to the US decision to impose tariffs on China.
• PHP: Short positioning has increased, with investors bearish on PHP due to weak inflation and trade data, and the upcoming overseas remittance figures and central bank meeting being key to its direction.
• SGD: Despite the USD's recent rise, SGD remains long, making USDSGD vulnerable to further upward correction.

China: Empty the Inventory

• Chinese corporates sold FX deposits during the USD rally.
• Combined with low forward points and dividend payments, this suggests a relatively weak RMB in Q3 2018.
• May affect Chinese USD bonds negatively.

USDSGD: Position for Further Upside

• USDSGD has lagged in the USD's recent rise.
• The market is still long SGD, which may lead to further upward movement.

CEEMEA: Positioning Trends in DTCC Data

• RUB and KZT positions via non-deliverable forwards (NDFs) are now neutral.
• USDZAR remains very long since April, indicating strong demand for ZAR.

EM Technical Note: FX Intervention Strategy

• No optimal FX intervention strategy was found.
• Discretionary intervention has a greater effect, but no single policy is clearly superior.

Brazil Bonds: Impact of National Treasury Intervention

• The National Treasury has withdrawn USD 1.2mn DV01 from bond buy-back auctions.
• Market portfolio risk decay has amounted to USD 1.4mn DV01.
• Overall, the market receiver position has decreased by USD 2.6mn DV01 or 3.9% of the total market DV01.

CDS Model for EM: Selling Protection Strategy in Brazil

• A formal framework was introduced to model the fair value of CDS.
• Brazil 5y CDS is overbought, suggesting a potential sell opportunity.

New Recommendations

Trade Review

FX and Rates

• Sell Brazil 5y CDS: New recommendation, with an entry level of 283bp and a target of 230bp.
• Receive 1y1y KRW NDIRS: Closed for a profit of 15bp.
• Receive 5y CNY repo NDIRS: Closed for a profit of 24bp.
• Buy USDINR 1m put spread: Expired out of the money.
• Long USDSGD 3m forward: Recommended with a target of 1.380 and a stop loss at 1.335.

FX Positions

• Long USDSGD 3m forward: USD 10mn, entry at 1.353, target at 1.380, stop at 1.335.
• Short USDCOP via 3m NDF: USD 8mn, entry at 2869.0, current at 2725.0, P/L -3.04%.
• Short USDPNEN via 3m NDF: USD 10mn, entry at 3.29, current at 3.19, P/L +0.88%.
• Long BRL against basket (CLP, EUR, AUD): USD 5mn and USD 10mn, with mixed P/L outcomes.

Options

• Buy USDINR 1m 1X2 put spread: P/L -0.14%.
• Long USDBRL OT: P/L -5.55%.
• Long USDBRL CS: P/L +0.31%.

Upcoming Events

In Asia

• Bank Indonesia (BI): Monetary policy meeting on 28 June. Expected to hike rates by 25bp to counter IDR depreciation.
• China: Official PMI figures on 30 June. Slowing economic growth and weakening demand are expected.
• Singapore: May inflation data on 25 June.
• South Korea: May industrial production numbers on 29 June.

In CEEMEA

• Czech National Bank (CNB): Monetary policy meeting on 27 June. Market expects a rate hike in June, but full hike may be delayed to August due to absence of Vice Governor Hampl.
• Turkey: Presidential and parliamentary elections on Sunday. AKP and MHP may secure 52.8% and 51.9% of votes, respectively, but election results remain uncertain.

In Latam

• Argentina: Monetary policy meeting on 26 June. Expected to hike rates by 300bp to 43%.
• Colombia: Monetary policy meeting on 29 June. Expected to halt easing cycle due to growth surprises and a more hawkish stance.

Key Data and Metrics

• FX Positioning Metrics: Z-scores over 5y history for various currencies.
• CDS and FX Positions: Detailed breakdown of positions, P/L, and current levels.
• Market Trends: Impact of economic data, central bank actions, and geopolitical events on FX and CDS.

Summary of P/L

Conclusion

The document highlights the current FX positioning trends in Asian and CEEMEA markets, emphasizing the shift to net short positions in KRW and PHP, and the long position in SGD. It also discusses the impact of central bank interventions on Brazil bonds and the introduction of a CDS selling strategy. Upcoming events, such as central bank meetings and elections, are expected to influence market dynamics in the coming week.