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EM Strategy Summary - 2 March 2018

Core Content

This document outlines the Emerging Markets (EM) strategy updates and market outlook for the week of 2 March 2018, provided by the EM Strategy Team at BNP Paribas and partner institutions.

Main Themes of the Week

China: Take Profit on Receiving 5-Year CNY NDIRS

• Recommendation: Take profit on the 5-year CNY NDIRS received position.
• Reasoning: The PBoC is unlikely to match Fed rate hikes, and CNY and USD curves have converged significantly, limiting further outperformance.
• Current Status: The 5-year NDIRS rate has fallen to 3.90% as of 26 February 2018.
• Risks Identified: A US rate hike in March and potential regulatory changes in late March could affect the CNY rate.

Korea: Growth Momentum Peaks

• Recommendation: Maintain the front-end receiver recommendation.
• Reasoning: Despite strong domestic fundamentals, the KRW is expected to weaken due to rising US real rates and increased market volatility.
• Market Outlook: The KRW has traded within a range of 1060-1100, with potential for a rise to 1120 in the next 3-6 months and a fall to 1050 over the medium term.
• Data Highlights: Recent data suggests that growth momentum has peaked, and the BoK is likely to only hike rates once more in mid-2018.

Turkey: Is High for Longer Enough?

• Inflation Outlook: February CPI is expected to fall by 0.3pp m/m to 10.0%, with core inflation easing slightly to 12%.
• Monetary Policy: The CBRT will likely keep the key late liquidity window rate at 12.75% and hold rates until there is a more significant improvement in inflation outlook.
• Real Interest Rate: The real interest rate is above historical averages, but not enough to improve inflation expectations, indicating that monetary policy is still not tight enough.

Brazil: New Pension Fund Investment Rules

• Regulatory Change: The CMN amended investment rules for pension funds and insurance companies, leading to a flattening of the DI curve.
• Impact: The new rules aim to address a distortion in the interest rate curve and NTN-F bond basis, which had moved to record negative levels.
• Strategy: The team continues to receive rates in the belly of the DI curve (FRA Jan20s/Jan21s), with an original target of 9.75% and a current PnL of 40bp positive.

Trade Positions

Key Market Outlooks

Asia

• China: Expect a consolidation phase for the CNY rate, with limited scope for further outperformance.
• South Korea: Expect the KRW to weaken due to rising US real rates and increased market volatility.
• Philippines: CPI figures will be released, and the BSP has not tightened despite inflation forecasts above its target range.

CEEMEA

• Turkey: CPI is expected to decline to 10.0%, but core inflation remains high at 12%.
• Poland: Expect the NBP to project a broadly unchanged inflation path, with a hawkish policy bias emerging in H2 2018.
• Czech Republic & Hungary: CPI data will be released, and the EURCZK outlook may be influenced by any deviation from market expectations.
• Russia: CPI inflation remains below target, suggesting the need for more rate cuts.

Latam

• Brazil: Expect the DI curve to flatten further, with the MoSF resuming 50y KTB issuance in mid-March.
• Mexico: Expect a possible decline in inflation, but the long-end of the TIIE curve remains a premium.
• FX Outlook: USDMXN is close to fair value, and the peso may trade in line with the broader EM FX trend, with potential for volatility due to NAFTA negotiations.

Forward Looking

Asia

• Next Week: China will release trade balance data on Tuesday (9 March), and CPI/PPI on Friday. The 19th National Party Congress starts on Monday (5 March).
• FX: No active trade recommendation on USDKRW, but a short recommendation could be activated if the pair falls to 1060.

CEEMEA

• Next Week: Focus on Turkey's CPI and MPC meeting on Monday and Wednesday. Poland's NBP meeting is also on Wednesday.
• FX: Expect continued consolidation in the USDKRW range.

Latam

• Next Week: Expect inflation data releases and continued monitoring of the DI curve and FX positions.

Summary of P/L

• Total P/L: 1607 kUSD
• Rates: 2172 kUSD
• FX: 892 kUSD
• Options: -659 kUSD
• Credit: -798 kUSD