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EM STRATEGY | DAILY - 06 February 2018 Summary

Core Content Overview

This document provides a market update and strategy insights from BNP Paribas Emerging Markets Research teams, focusing on recent developments in Asian, CEEMEA, and Latin America (Latam) markets, with an emphasis on FX, interest rates, and inflation data.

Key Market Developments

• Asian Markets: Continued sharp sell-off on Tuesday, with losses across FX, credit, and equities. The 10y USTs rallied 15bp overnight. MYR and IDR were among the weakest in the FX complex due to a correction in oil prices.
• Philippines CPI: January CPI rose sharply to 3.9%, exceeding expectations and approaching the upper tolerance level of the target band. This supports the expectation of a central bank rate hike and reserve ratio cut on 8 February.
• FX Positioning: Asian FX positioning was deeply long, and technical indicators suggested a correction. The document advises selling USDPHP, as it is trading at significant highs.
• CEEMEA: The Central Bank of Turkey (CBRT) reported headline CPI at 10.3% y/y, with core inflation easing slightly to 12%. Despite some TRY depreciation, CBRT is unlikely to ease monetary policy soon, as headline inflation remains significantly below the policy rate of 12.75%.
• Latam: The document highlights that the fair value of Brazilian rates (DI) is expected to be ~60 bp lower than current levels, despite recent moves in DIs and US rates. A rate decision is anticipated, with a target of 9% for DI Jan20sJan21s FRA.

Main Views and Insights

• EM Local Rates Drivers: A multi-region principal component analysis (PCA) shows that US rates, global financial conditions, and the global risk premium are the main factors influencing EM local rates.
• Market Risk: While the models' values seem normalized, market positioning still poses a risk. Hedges are maintained for existing core allocations.
• Investment Strategy: The document suggests caution and a potential sell-off in USDPHP if the BSP delivers a rate hike. In Brazil, the model indicates that current rates are overvalued, and a correction may be necessary.
• Technical and Fundamental Analysis: The document references technical indicators and fundamental data, such as inflation and central bank decisions, to support its investment views.

Key Charts and Data

• Chart 1: Highlights strong flows that supported Asian currencies over the past year.
• Chart 2: Shows the Philippine CPI at a significant high and the USDPHP pair in a strong position, suggesting potential rate actions by the BSP.

Contacts

Production and Editorial

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Online Resources

• BNP Paribas Global Markets Website: www.globalmarkets.bnpparibas.com
• BNP Paribas Strategy Website
• Bloomberg:
  • Fixed Income Research (BPFR)
  • G10 Interest Rate Research (BPBS)
  • Emerging Markets Research (BPFR)
  • Market Economics (BPEC)

US Disclosures

• Options: Complex instruments with high risk, suitable only for sophisticated investors.
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UK and France Disclosures

• UK: This document is communicated by BNPP London Branch, authorized by ECB, ACPR, and FCA.
• France: The report is produced and/or distributed by BNPP SA and BNPP Arbitrage, both authorized and supervised by ECB and ACPR.

Final Notes

• The document is intended for professional clients and eligible counterparties.
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