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EM Strategy Summary - 8 September 2017

Core Content

This document provides a detailed analysis and recommendations from the Emerging Markets (EM) Strategy Team at BNP Paribas, focusing on key market developments in China, South Africa, Turkey, Chile, and Peru, along with other EM regions. It also includes insights on the FX and interest rate (IR) strategies and upcoming economic data releases.

Main Views and Key Information

China: Trade with the Trend

• NDIRS Rate: The team expects the NDIRS rate to rise, but is waiting for it to fall to a lower level to position for the trade.
• RMB Appreciation: The PBoC seems to accept the RMB's current appreciation, and corporate selling of USDCNY is expected to continue.
• Shantytown Renovation Monetisation: This project has been a key driver of high property sales growth in third and fourth tier cities, helping to stabilise the total property market.
• FX Market: The RMB index has risen to 95.20, similar to levels seen in late 2016, and the PBoC has not intervened to curb the appreciation.
• Funding Cost: The CNH funding cost remains low at 3.2%, while onshore NCD yields have risen to 4.6%. The team believes the carry opportunity between NCD and CNH CCS is limited compared to 2014.
• Repo Fixing: The repo fixing mechanism has become more market-driven since late August, with less impact from the counter-cyclical factor.

South Africa - Turkey: Add to Long TRYZAR Trade

• TRY Appreciation: The TRY is expected to appreciate due to high inflation and the central bank's need to maintain credibility.
• TRY-ZAR Differential: The TRY-ZAR rate differential is expected to remain substantial.
• Trade Recommendation: The team recommends adding to the long TRYZAR trade with an entry level at 3.76, a target of 3.88, and a stop at 3.70.

Chile: August Pension Funds Monitor – Local Equities on the Rise

• Pension Fund Allocation: The shift in allocation towards riskier funds has not been a key driver of the Chilean peso's performance.
• FX Strategy: The team recommends a CLPxCAM 1s2s flattener, expecting the BCCh to keep policy on hold until the end of the year.

Peru: Local Debt Monitor – An Additional Increase in Foreign Holdings

• Foreign Holdings: Overseas investors' share of Peruvian local-currency debt increased to 49% in July 2017.
• PEN Appreciation: The BCRP has continued to intervene in the FX market to curb excessive appreciation of the PEN.

Brazil IR/DI Strategy: Double-digit Rates, Receive'em While You Can!

• DI Receivers: The team has extended the targets of their DI Jan25 and DI Jan20sJan21s FRA receivers.
• Carry and Risk Premium: High carry and the excessive risk premium in the belly and long end of the curve support the strategy.

New Recommendations

Trade Review

What's Up Next Week?

In Asia

• Economic Data: Singapore's July retail sales, China's August industrial production and money supply data, India's August CPI, and South Korea, Indonesia, and Philippines' economic reports are expected to be released.
• RMB Monitoring: The team expects the PBoC to keep the money market stable close to the quarter-end MPA and the 19th Party Congress on 18 October.

In CEEMEA

• Inflation Data: The Czech Republic and Poland will release August inflation data. The team expects the market to be particularly sensitive to the Czech data.
• Monetary Policy: The central banks of Turkey and Russia will hold their monetary policy meetings. The team remains long the TRY against the ZAR and EUR, and expects a potential 50bp rate cut in Russia.

In Latam

• Chile: The monetary policy decision on Thursday will reflect the latest economic activity numbers and the central bank's neutral view. The team continues to favor a CLPxCAM 1s2s flattener.
• Brazil: The government will push for the approval of the social security reform. The team reinforces its bullish positions in Brazilian rates and long BRL in a relative value trade.

Summary of Key Takeaways

• The EM Strategy Team continues to monitor and recommend trades based on economic data, inflation trends, and monetary policy.
• The RMB index has risen due to appreciation against non-USD currencies, and the PBoC is not intervening.
• The team recommends adding to the long TRYZAR trade, expecting continued TRY appreciation.
• The shantytown renovation monetisation project is a key driver of property sales in tier 3 and 4 cities.
• The FX and IR strategies are adjusted based on market conditions and carry opportunities.
• Inflation data and central bank policy meetings are seen as key drivers in the coming week.