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EM Strategy Summary - 1 September 2017

Core Content

This document outlines the Emerging Markets (EM) strategy for the week of 1 September 2017, focusing on Asia, CEEMEA, and Latin America (Latam). It includes insights from various BNP Paribas branches and Turk Ekonomi Bank A.S. on currency and interest rate positions, as well as the introduction of a new Argentina Monetary & Debt Monitor.

Main Views and Key Information

Asia

• Buy SGD vs TWD: The strategy recommends a 3m long SGD/TWD position.
  • Rationale: While the MAS is unlikely to tighten policy in October, a surprise tightening cannot be ruled out. The TWD has stabilized, but is highly cyclical and may appreciate only gradually against the USD.
  • Position: 3m long SGD vs TWD, entry at 22.09, target at 22.80, stop loss at 21.60.
  • Carry: Positive carry of ~2% per annum.
• Trade Review:
  • Closed recommendation to receive 1y1y KRW NDIRS.
  • Rolled 3m short USDCNY NDF into a fresh 3m position, extended target to 6.50.
  • Performance: Total P/L of USD 5,628k, with significant contributions from FX and Rates strategies.

CEEMEA

• No new recommendations.
• Focus on Turkey: Expected to maintain tight monetary policy due to rising inflation, which is likely to remain in double-digit territory.
• Poland: Central Bank is expected to keep rates unchanged, and the rate curve is flattening due to weak inflation pressures.
  • Position: Maintained 2s5s flattener.

Latam

• Brazil:
  • Recommend receiving DI Jan-25 and receiving Jan18sJan20s FRA of local USD rates.
  • DI Jan-25: PV01/notional USD 8k, entry level 10.28%, target 9.90%, stop loss 10.55%.
  • Jan18sJan20s FRA: PV01/notional USD 9k, entry level 3.03%, target 2.83%, stop loss 3.33%.
  • Market Outlook: BCB expected to cut policy rates by 100bp, with the long end of the DI curve showing a risk premium of ~100bp.
• Mexico:
  • Recommend steepening TIE 1Y-3Y due to inflation drifting away from the target.
  • Performance: Steepener trade with a positive carry of +10 bp.
• Chile:
  • Recommend flattening CLPxCAM 1Y-2Y.
  • Performance: Positive carry of +14 bp.
• Colombia:
  • Recommend paying IBR 1y.
  • Performance: Positive carry of +1 bp.
• Other Positions:
  • Pay USDCLP 3m NDF (take profits).
  • Long USDMXN and USDBRL options with varying performance outcomes.

New Recommendations Table

Argentina Monetary & Debt Monitor

• A new comprehensive monitor was introduced to track monetary and debt variables in Argentina.
• Key Highlights:
  • USD Demand: Private sector USD deposits increased by 5.4% in August 2017, with a core retail demand of USD 1.719bn.
  • FX Market Volume: Reached a record high of USD 42.3bn in July 2017.
  • International Reserves: Stable at USD 47.8bn, with net reserves at USD 31.3bn.
  • IMF Reserve Adequacy: Argentina holds sub-optimal reserves at USD 31.3bn, compared to the optimal level of USD 52.3bn.
  • Lebac Curve: The stock of Lebacs rose to ARS 951.584bn, with the 20-Sep-17 maturity holding the largest share at 51.49%.
  • BCRA Balance Sheet: Net worth is USD 4.8bn, but when adjusted for illiquid assets, it is negative at USD -71bn.
  • Mutual Funds: Total AUM reached ARS 495.1bn (USD 27.9bn), with fixed income funds holding the largest share (72%).
  • Strategy: Opportunistically long ARS due to carry, with a belief that the risk premium is low when adjusted for fiscal factors.

What's Up Next Week?

• Asia: Focus on Malaysia's policy meeting and PMI data. Philippines and Indonesia may see CPI data influencing policy.
• CEEMEA: Turkey's CPI data will be a key focus, likely showing inflation back in double digits. Poland's policy meeting may see rate cuts.
• Latam: Brazil's BCB is expected to cut rates by 100bp, and Argentina's monetary variables will be closely watched.

Summary of Key Metrics

• Total P/L: USD 5,628k
• Rates P/L: USD 1,979k
• FX P/L: USD 3,152k
• Options P/L: USD 498k
• Credit P/L: USD 0k

Conclusion

The EM Strategy for the week reflects a mix of carry trades, relative-value trades, and strategic positioning in response to monetary and fiscal developments. The focus on Argentina includes a new monitor and an opportunistic long position in ARS, while Brazil and Mexico continue to show strong interest in DI and TIE instruments. Asia's strategy emphasizes the SGD vs TWD trade and the potential for policy surprises. Overall, the strategy remains aligned with the expectation of continued global liquidity and the impact of real interest rate differentials on EM performance.