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EM STRATEGY DAILY - 01 February 2018 Summary

Core Content

This document provides a summary of the emerging markets (EM) strategy outlook for 01 February 2018, focusing on key events and market reactions across various regions.

Key Market Reactions

• FOMC Statement: The hawkish FOMC statement led to increased pricing for a March rate hike and almost full pricing for three hikes by year-end. However, the USD failed to sustain its initial positive reaction.
• Asian Equity Markets: Generally higher overnight, with mixed FX performance.
• India: The FY18 budget deficit was missed at 3.5%, aligning with economist expectations. A 10% Long Term Capital Gains (LTCG) tax on equities with gains above INR 100,000 was introduced, causing USDINR to spike by 0.5%. Corporate tax cuts from 30% to 25% for corporations with turnover over INR 2.5Bn supported equities.
• South Korea: January CPI fell to 1% YoY, below market expectations of 1.3%. This suggests a more cautious approach to rate hikes, with only one expected for the year.
• Chile: The central bank is expected to hold rates, with the CLPxCAM curve reflecting no cuts. A short peso position via 3-month NDF is maintained due to USDCLP being above 635 in fair value models.

Central Bank Meetings

• Hungary: The MNB will hold its second IRS tender of the year. The HUF has appreciated against EUR and USD, and while the MNB may not increase supply significantly, a steepening curve could lead to higher supply in the future. The strategy team remains long EURHUF (10mio EUR) and received in HUF 5y IRS (5k USD allocation).
• Czech Republic: The CNB is expected to raise rates by 25bp to 75bp. The 1x4 FRA is pricing just under 20bp of tightening. The team remains long EURHUF and expects a rate hike in line with consensus.
• Latam: The BCCh is expected to hold rates, with the CLPxCAM curve reflecting no cuts. The team continues to hold a short peso position via 3-month NDF.

Key Information

• The USD's initial positive reaction to the FOMC statement was not sustained.
• The MNB is focused on preventing abrupt steepening of the Hungarian curve and is monitoring the HUF exchange rate.
• The CNB is expected to hike rates, with a focus on updated inflation and FX assumptions.
• India's budget deficit and LTCG tax had a mixed impact on equities and FX.
• South Korea's CPI data suggests a more cautious rate hiking environment.
• In Chile, the central bank is expected to hold rates, with no immediate impact on the currency.
• The fair value model for USDCLP remains above 635, supporting the short peso position.

Strategy Positions

• Hungary: Long EURHUF (10mio EUR), received in HUF 5y IRS (5k USD allocation).
• Chile: Short peso position via 3-month NDF.
• South Korea: Positioned to receive 1y1y Korea NDIRS at 2.20%.

Contacts

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