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EM Strategy | Global Weekly - 10 March 2017 Summary

Core Content

This document outlines the current outlook and recommendations for Emerging Markets (EM) strategies across different regions and asset classes. It is produced by the EM Strategy Team at BNP Paribas, including contributions from various strategists and branches.

Main Viewpoints

• G7 Monetary Policy: The G7 is expected to adopt less accommodative monetary policies over the next two years, with the US Federal Reserve anticipated to raise interest rates and reduce its balance sheet. This poses challenges for EM due to higher yields and potential capital outflows.
• EM Carry Differentials: Despite the tightening in G7 monetary policy, EM assets are expected to hold up in the short term due to high carry differentials, better external balances, and strong global growth, especially in China.
• Speculative Inflows and Risks: Speculative inflows into EM assets have been significant, but the increased positioning in commodities like oil and copper raises concerns about sustainability. A "reflation trade" is expected to be tested as US rates rise.
• China's RMB Internationalisation: The RMB internationalisation remains on the policy agenda, with the CNH market showing some signs of stabilization. However, the RMB's role as a reserve currency is still constrained by the USD's strength.
• FX Manipulation Concerns: North Asian central banks are adopting a more hands-off approach to FX management, but Thailand continues with active FX reserve accumulation.

Key Information

EM Credit Strategy

• The next CDS roll in March 2017 is expected to be tighter and steeper.
• Recommendations include selling steep rolls where the vol-adjusted carry is high, especially for Turkey and Argentina.
• The CDX EM versus CDX IG ratio remains a key recommendation.
• Basis trades are advised with caution due to current high basis levels.

Asia FX Strategy

• India: The BJP's poor performance in Uttar Pradesh may lead to weakness in the INR, but it is unlikely to have a lasting effect.
• Indonesia: Bank Indonesia is expected to maintain steady policy rates and focus on transmission issues.
• Thailand: FX reserves are increasing, and the central bank continues to manage the currency actively.
• China: FX reserves increased unexpectedly in February, suggesting efforts to curb outflows and stabilize the RMB.

China Strategy Insights

• RMB internationalisation is still a priority, but progress is slow.
• The CNH market is showing signs of stabilization with improved liquidity and convergence of CNH-CNY spot spreads.
• Rising interest rates in China create relative value opportunities in the fixed-income market.
• The bond-swap spread has widened to 1%, but there is no clear signal to sell swaps due to potential rate hikes.
• The credit spread suggests buying liquid local-rated AAA corporate bonds.

CEEMEA Strategy

• The next week will bring several data releases, including Poland's CPI inflation and South Africa's manufacturing production.
• The Turkish central bank is expected to keep policy rates unchanged and maintain a tight stance.
• The CLP is undervalued, and the COP is recommended as a higher-yielding currency for trading.

Latam Strategy

• Chile: The Central Bank of Chile is expected to cut policy rates by 25bp due to weak economic data.
• Brazil: The BRL's performance will be influenced by the Central Bank of Brazil's FX swap rollover in April 2017.
• Colombia: The COP is recommended as a long against a basket of CLP and EUR via 1m NDF.
• Argentina: USDARS NDF trades are advised, with a focus on shorting 3m against long 12m.

New Recommendations

Trade Review

• Interest Rates: The TRY 1v5 xccy steepener (3m forward start) was stopped out. Other positions include receiving 2Y1Y TH IRS and paying 1Y1Y RUB XCCY.
• FX: The team has sold 3m SGDCNH outright, shorted USDMXN via Mar-18 FWD, and is long USDARS 1y NDF against short USDARS 3m NDF.
• Options: Buy 1xUSDZAR 2m call and sell 1.5xUSDZAR 2m call, buy 3m USDJPY / USDKRW dual digital.
• Credit: Switch from Saudi Arabia $ '46s into Qatar $ '46s.

Upcoming Events

• Asia: India's state election results on 14 March, Bank Indonesia meeting on 16 March, China's retail sales and industrial production data on 14 March.
• CEEMEA: Poland's CPI inflation on 16 March, South Africa's manufacturing production on 16 March, Turkey's MPC meeting on 16 March.
• Latam: Chile's monetary policy committee meeting on 16 March, Brazil's FX swap rollover in April 2017.

Key Charts

• Chart 1: USDKRW vs FX reserve change
• Chart 2: USDTWD vs FX reserve change
• Chart 3: USDMYR vs FX reserve change
• Chart 4: USDPHP vs FX reserve change
• Chart 5: USDTHB vs FX reserve change
• Chart 6: USDSGD vs FX reserve change
• Chart 7: USDINR vs FX reserve change
• Chart 8: USDIDR vs FX reserve change
• Chart 9: RMB's share in total payments
• Chart 10: Convergence of 3-month SHIBOR and yields of CNH and CNY implied from swaps

Conclusion

The EM Strategy team is cautiously optimistic about EM assets holding up in the short term due to strong carry differentials and external balances. However, the long-term outlook is challenged by the tightening of G7 monetary policy and rising US yields. The team continues to monitor FX reserves, credit spreads, and policy changes in key EM countries to identify relative value opportunities and manage risks effectively.