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EM Strategy Summary - 20 April 2018

Core Content

This document provides a weekly summary of emerging markets (EM) strategy insights from BNP Paribas and Turk Ekonomi Bank A.S. It covers key market movements, trade reviews, and new recommendations across various regions including Asia, CEEMEA, and Latin America (Latam), with a focus on interest rates, foreign exchange (FX), and credit strategies.

Main Regions & Key Points

Asia

• China: The 5Y Chinese government bond (CGB) yield has exceeded the $3.5%$ target, prompting the strategy team to lock in a $+40$ bp profit.
  • The rally was driven by concerns over US-China trade tensions.
  • The PBoC has maintained liquidity and the new governor, Yi Gang, is expected to keep policy stable.
  • The team recommends taking profits and suggests that bond supply will increase in 2Q, potentially reducing the technical rally.

CEEMEA

• Turkey: The team recommends taking profits on half of the 10Y local bond trade initiated on 16 April.

  • The bond yield has dropped to $12.6%$ and USDTRY to 4.03, resulting in a $4%$ return.
  • Remaining trade has been adjusted with a new target of $12.2%$ and stop-loss at $13.05%$.
  • The CBRT is expected to raise the average repo funding rate by 50bp to $13.25%$ on 25 April due to deteriorating inflation expectations.

• Hong Kong: The HKMA has intervened in the FX market, pushing USDHKD 12m forwards up 200 pips.

  • The team expects forwards to overshoot to at least -300 pips and recommends waiting for these levels before entering a received HKD position.
  • Spot has stabilized just below the HKMA's trading band, but the currency remains vulnerable to outflows.

• Russia: The CBR is expected to keep the policy rate on hold, aligning with market consensus.

  • The team believes the central bank will adopt a 'wait-and-see' approach due to inflation being below target.

• Hungary: The MNB is expected to keep policy rates steady at $0.9%$, as it has since 2016.

  • The HUF has appreciated due to the spread with core European rates.

• Poland: The central bank will release minutes of its latest meeting on Friday, following retail sales data on Monday.

Latin America (Latam)

• Brazil: The team recommends increasing the short USDBRL position from USD 15mn to USD 20mn.

  • Local macro hedge funds have shifted their BRL positioning to the short camp.
  • The team remains cautious about the long-end of the bond curve due to expected higher supply in 2Q.

• Mexico: A receiver position on 1y1y TIIE has been opened, based on expectations of policy rate cuts in H2 2018.

  • The team is increasing its short USDBRL position and maintaining a neutral stance on the COP.

• Colombia: The central bank is expected to cut policy rates by 25bp on Friday.

  • The team has shifted to a neutral stance on COP and maintains a flattener position in IBR and a 5y payer against Mexican TIIE.

New Recommendations

Trade Review

What's Up Next Week?

• Asia: Light calendar with no central bank meetings or political events.

  • South Korea's 1Q GDP will be released on 26 April.
  • The Bank of Korea forecasts $3%$ GDP for 2018.

• CEEMEA: Focus on central bank meetings.

  • CBR (Russia) will hold policy rates on 27 April.
  • MNB (Hungary) will meet on 24 April.
  • Poland will release central bank minutes and retail sales data.
  • Turkey's MPC meeting on 25 April is expected to result in a 50bp rate hike.

• Latam:

  • Colombia is expected to cut policy rates by 25bp on 26 April.
  • Mexico will release MPC minutes on 26 April, with expectations of policy rate cuts in H2 2018.

Key Information

• The team is taking profits on several trades, including the 5Y CGB in China and the 10Y Turkey bond.
• FX interventions in Hong Kong are expected to continue, with forwards likely to overshoot to -300 pips.
• The CBRT is expected to hike rates, supporting the long-end of the bond curve.
• In South Africa, the Ramaphosa administration is moving quickly on anti-corruption efforts, with structural reforms closer to decision.
• In Brazil, local macro hedge funds have shifted to a short position, affecting the BRL's performance.
• The team is increasing the short USDBRL position and maintaining a neutral stance on the COP.