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EM Strategy Summary - 05 February 2018

Core Content

This document provides an overview of the emerging markets (EM) strategy for the week of 5 February 2018, highlighting key market developments, central bank actions, and economic data releases. It is produced by BNP Paribas and outlines the current market sentiment, rate forecasts, and investment implications across various regions.

Main Views and Key Information

Asia

• US Policy Rate Outlook: G10 economists have revised up their US policy rate forecasts, now expecting four rate hikes in 2018 and one in early 2019, driven by stronger growth, faster inflation, and increased confidence in FOMC inflation projections.
• Philippines: The Central Bank of the Philippines (BSP) is expected to hike rates on Thursday (6 February), as the PHP has weakened this year. The BSP may cut reserve ratios, which are currently at 20%, to maintain policy credibility.
• India: The Reserve Bank of India (RBI) is expected to keep policy rates on hold on 7 February, as the rate-cutting cycle has ended. The focus is now on the rate-hike cycle expected in H2 2018.
• Taiwan and China: CPI data for January will be released on 6 and 9 February, respectively. The Taiwan CPI is closely watched due to the recent rate hike by the Bank of Korea. China's CPI data may influence market sentiment.
• FX and Equities: Asian equity indices and FX markets have seen selloffs due to concerns over higher US inflation and interest rates. The USDPHP pair is at a critical level, with a bias to sell depending on the BSP's rate decision.

CEEMEA

• Turkey: January inflation declined to 10.35% y/y, slightly below the consensus of 10.59%. The base effect from the previous year may slow the disinflation pace in the coming months.
• Hungary: The National Bank of Hungary (NBH) is focused on containing the spread between domestic and core European yields. The central bank is expected to maintain IRS volumes at HUF1.2tn, which may allow the yield curve to steepen further.
• Poland: The central bank is expected to keep policy rates unchanged on 7 February. Despite upward revisions in growth and inflation forecasts, the Monetary Policy Committee remains dovish.
• South Africa: Political developments are the main focus, with the possibility of President Zuma's resignation this week. The USD/ZAR interest rate differential is tightening, leading to a correction in USDZAR. The 1-month USDZAR call spread was rolled over for a 0.36% premium.
• Russia: The Central Bank of Russia (CBR) is expected to cut rates by 25-50bp on 9 February. Inflation is currently at 2.5% y/y, below the central bank's 4% forecast. The January CPI data will be released on 8 February.

Latam

• Brazil: The Central Bank of Brazil (BCB) is expected to cut the Selic rate by 25bp on 7 February. The decision will also be influenced by the March rate cut possibility, as domestic risk assets have improved recently.
• Mexico: The focus is on the bi-weekly CPI release on 8 February, which may signal a moderation in inflation. Banxico is expected to leave rates unchanged, but the decision is uncertain due to mixed signals.

Key Investment Implications

• EM Strategy Plus is highlighted as a weekly publication offering insights into EM markets.
• Market Sentiment: EM currencies are under pressure due to the tightening USD rate differential, with PHP and ZAR being particularly affected.
• Rate Hikes and Cuts: The US and EM central banks are at different stages of monetary policy, with the US moving toward higher rates and EM central banks still considering rate cuts.
• Yield Curve Dynamics: In Hungary, the yield curve may steepen due to the central bank's focus on yield spreads. In Brazil, the yield curve is seen as overpriced, with expectations of a Selic rate cut to 6.75%.

Contacts

Legal Notice

• This document is non-independent research and may be subject to conflicts of interest.
• It is a marketing communication and not investment research.
• It may include Research as defined under MiFID II, which is available only to certain clients.
• The document is for information purposes only and does not constitute an offer to sell or issue securities.
• No liability is accepted for any loss arising from the use of this document.
• Indicative prices are provided and may not reflect actual transaction terms.
• Options and ETFs are complex instruments and carry significant risk. They are not suitable for all investors.

Online Resources

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

United States Disclosures

• Options: Complex instruments not suitable for every investor. Only sophisticated investors may be appropriate for such investments.
• ETFs: May involve currency, geopolitical, credit, and interest rate risks. BNPP may have conflicts of interest related to ETFs.
• Restricted Securities: Certain securities may not be registered under US securities laws and are only available to Qualified Institutional Buyers (QIBs) or non-US persons.