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EM Strategy Summary - Global Weekly (09 December 2016)

Core Content

This document outlines the current market outlook and trade opportunities for Emerging Markets (EM) in the context of interest rates, foreign exchange (FX), and credit strategies. It is authored by a team of strategists from BNP Paribas across different regions, including London, Singapore, China, and Brazil, with additional insights from Turk Ekonomi Bank A.S. and other local experts. The focus is on identifying overdone sell-offs and recommending trades to capitalise on market adjustments.

Main Themes and Recommendations

Asia

• USDCNH Forwards: Concerns about capital outflows led to tighter CNH funding and a sharp rise in CNH implied rates. The team recommends taking profit on the 1x12 paid recommendation, as the adjustment in the curve has already achieved its objective.
• China Rates Sell-off: The recent sell-off in China's bond market appears overdone. The PBoC's policy is aimed at controlling asset bubbles and financial risks, not at a prolonged freeze in issuance. A 5-year NDIRS receiver trade is initiated, targeting 3.2%, with a stop at 3.7% and entry at 3.5%.
• FX Reserves: Despite a slightly more than expected decline in China's FX reserves, other Asian countries showed much better performance. This suggests foreign investors are not in a rush to repatriate funds, with subdued demand for USD.
• Korea: The Bank of Korea (BoK) is expected to keep rates unchanged. The political crisis may influence its decision on growth risks.
• India: Trade and current account data for November will be released, with potential impact from demonetisation and gold imports.
• FX Strategy: A new recommendation to buy 1m USDTWD NDF is made, and a 12m SGDIDR NDF sell is ongoing.

CEEMEA

• Turkey: The xccy curve is expected to steepen due to a slowdown in economic activity. The team recommends buying 1v5 xccy steepeners in 3m forwards.
• Poland and Romania: Poland's CPI data and Romania's general election are highlighted. The Polish core inflation rate is expected to remain in negative territory.
• South Africa: Focus is on November inflation data (CPI and PPI), with expectations of a rise in CPI due to fuel prices.

Latin America

• Chile: The central bank is expected to keep policy on hold, with a risk of easing bias in the coming year.
• Mexico: Banxico's rate decision on Thursday is crucial. The team recommends a 1y1y receiver position, as the front end of the IRS curve still has too much premium.
• Colombia: The central bank may leave rates unchanged, but there is a risk of new dovish signals leading to further rallies in the IBR curve.
• Brazil: The DI Jan25 receiver trade is highlighted, with a belief that the central bank will continue to lower rates further next year. A USDBRL 4.00 call is recommended to hedge against tail-risk events.

Key Information

• China: The PBoC's liquidity policy is 'balanced-tight', with a focus on controlling asset bubbles and financial risks. The 7-day repo rate is expected to average around 2.8%.
• Emerging Markets FX Performance: EM FX showed a better tone this week after a sharp sell-off in November. Higher oil prices and stabilised US rates helped commodity exporters.
• Credit Strategy: A new recommendation to sell a Latam CDS basket (Argentina, Brazil, Colombia, Mexico) is made, with a notional of USD 10mn. Additionally, a long USDBRL 4.00 call is suggested to hedge against unexpected tail events.
• Market Factor Analysis: A new approach is introduced for Latam markets, supporting the recommendation to be long Brazilian assets.
• Risk Management: The team is cautious about duration for local investors, suggesting they buy 3m/6m CDS issued by Chinese banks at 3.4% to 3.6%.

New Recommendations Table

Summary of Key Events

• Asia: China's FX reserves declined more than expected, but the decline was less than anticipated due to subdued USD demand. India's trade and current account data will be released, and China's total social financing for November will also be published.
• CEEMEA: Non-OPEC oil producers are expected to meet in Vienna to propose production cuts. Russia's GDP data for Q3 2016 will be released, and the CBRT may not hike rates sharply due to economic slowdown.
• Latin America: Chile's central bank may keep rates on hold. Mexico's Banxico policy rate decision is important, and Colombia's central bank may leave rates unchanged but face potential dovish signals.

Conclusion

The team believes that while EM markets have had a poor performance in November, the recent sell-off may have been overdone, especially in China and Brazil. They recommend taking profit on certain FX and rates trades, while also suggesting hedging strategies against tail risks. The overall sentiment is cautiously optimistic, with a focus on market adjustments and policy responses.