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EM Strategy Summary - 4 August 2017

Core Content

This document provides a weekly summary of Emerging Markets (EM) strategy from the BNP Paribas EM Strategy Team, focusing on currency, interest rates, credit, and options positions across key markets. It outlines the team's current views and trade recommendations, highlighting both macroeconomic insights and specific market actions.

Main Themes and Views

Hong Kong

• Spot USDHKD has reached a new year-to-date high, nearing the 7.75-7.85 corridor.
• The HKMA is likely to remain passive and avoid FX intervention until the rate approaches the top of the corridor.
• The HKMA may proactively drain excess liquidity via EFN issuance or FX swaps.
• The rate differentials between USD and HKD are widening, but valuations are not extreme.
• The team recommends reducing risk in received HKD swaps and long USDHKD trades.
• They maintain a buy USDHKD call spread strategy.

China

• The team is taking profit on the recommendation to receive 1y1y CNH CCS, which has moved from 4.15% to 3.90%.
• CNH liquidity is expected to remain flush, but market valuations have adjusted and the trend is stalling.
• Offshore-onshore spreads have narrowed, and the team continues to recommend selling USDCNH and USDCNY (NDF).
• The repo market is complex, with the interbank pledged repo and exchange repo being the most significant segments.
• The 7-day repo market has seen a significant increase in volume, indicating market prudence.
• The team is not surprised by the current tightening in market funding, but notes that yields and IRS rates have not risen.
• A change in sentiment could occur in September due to potential Fed balance sheet reductions and strong Chinese economic data.

Czech Republic

• The CZK has appreciated against the EUR, which has limited imported inflation.
• The CNB is expected to hold rates at its meeting on 3 August.
• Market expectations for rate hikes are close to CNB projections.
• The CZK appreciation is expected to continue, which may lead to a dovish hike.
• The PRIBOR is expected to rise gradually, but the team believes that more tightening beyond 2018 is unlikely without significant upward adjustments to the European curve beyond 2 years.

Turkey

• The budget deficit is expected to narrow to TRY 0.5bn in July.
• Industrial production is forecast to grow by 3.6% y/y in June.
• The central bank may tighten monetary policy further if inflation pressures persist.
• The first step could be an end to ON interbank funding, raising the average repo rate by 25bp to 12.25%.

Brazil

• The 5y CDS is trading close to 200bp, and the team expects it to continue declining.
• The Brazilian real is expected to outperform as reforms progress.
• The team is positioned in nominal rates, with a focus on the DI curve.
• They recommend steepeners on the TIIE curve due to the possibility of more rate cuts in 2018.

Peru

• Overseas investors' share of local debt increased to 47.6% in June.
• The central bank has been conducting direct USD purchases to counter the sol's appreciation.

Key Trade Recommendations

Interest Rates

• Receive 2y2y fwd ZAR: 15k USD, +7bp
• Receive 1Y1Y KRW NDIRS: 5k USD, +4bp
• Receive 1Y1Y CNH CCS (take profit): 10k USD, +25bp
• Receive Brazil DI Jan20sJan21s FRA: 25k USD, +25bp
• Steepening Mexico TIIE 1Y-3Y: 10k USD, +7bp
• Flattening Chile CLPxCAM 1Y-2Y: 8k USD, +7bp

FX

• Sell 3m ZAR vs. TRY: USD 10mn, 2.72%
• Sell 3m USDCNY NDF: USD 20mn, 2.82%
• Sell 3m USDCNH (rolled into new 3m): USD 10mn, 3.33%
• Short USDCOP via 3m NDF: USD 8mn, 2.67%
• Short USDARS via 3m NDF (closed): USD 10mn, -4.28%

Options

• Buy 3m USDINR ATMF put: USD 10m, 0.46%
• Buy 1m USDZAR call spread: USD 20m, -0.50%
• Buy 1y EURTRY ATM put: EUR 10m, -0.98%
• Buy USDINR 3m 66.10 put, financed by selling 64 - 66 strangle: USD10m, 2.50%
• Long USDBRL OT 2.90: USD 1mn, 3.57%
• Long USDBRL CS k=3.35-3.65: USD 30mn, -0.19%

Credit

• Buy Turkey '45s: USD 5mn, -1bp
• Buy Turkey '22s, buy Turkey 5y CDS: USD 5x5.58mn, 0bp
• Buy Argentina 5Y CDS vs Sell 5Y EM CDX: 20k USD, +16bp

Total Performance

• Total P/L: 5,878 kUSD
• Rates: 2,518 kUSD
• FX: 2,637 kUSD
• Options: 491 kUSD
• Credit: 232 kUSD

Upcoming Events

Asia

• Philippines BSP policy meeting on 10 August.
• Trade and CPI data for Taiwan and China on 7 and 8 August.
• Foreign reserve data for Malaysia, Indonesia, Singapore, Hong Kong, the Philippines, and China on 7 August.
• Singapore markets closed on 9 August for National Day.

CEEMEA

• Hungary inflation release on 8 August, expected to rise slightly.
• Czech Republic CPI release on 9 August, expected to decline.
• Polish CPI release on 11 August, preliminary data showed a rise.

Latam

• Brazil IPCA inflation release on 9 August, expected to fall below 3%.
• Mexico Banxico policy meeting on 10 August, expected to remain on hold.
• Legislative agenda in Brazil, with potential reforms in energy and social security.

Summary of Strategy Outlook

• EM assets are expected to continue to rally due to the flat USD and stable commodities.
• The team maintains a positive outlook on EM, with a focus on currency appreciation, interest rate trends, and credit opportunities.
• The tipping point for HKMA intervention is close, but the team remains cautious about contrarian trades.
• The CDS market in Brazil is expected to continue declining, with a fair value below 200bp.
• The repo market in China is complex, but the team believes rates have room to rise.
• The CZK is expected to appreciate further due to hawkish CNB policy and EUR strength.
• The central bank of Turkey may tighten monetary policy if inflation remains high.