20180323-法国巴黎银行-EM_STRATEGY_PLUS_27页_1mb

EM Strategy Summary: 23 March 2018

Core Content

The document provides an overview of the Emerging Markets (EM) strategy for the week of 23 March 2018, focusing on the impact of the US-China trade tensions, currency dynamics, and market reactions across various EM regions.

Main Themes

China: Short-term RMB Headwinds

• Context: Trade tensions and rate differentials are near-term headwinds for the RMB.
• Recommendation: Remain cautious in the short term.
• Market Outlook: The RMB has been stable against the USD and the CFETS basket since January. While we are bullish in the medium term, we do not expect a significant appreciation in the near term due to potential volatility from trade tensions.
• Key Factors: The PBoC is expected to focus on domestic factors and may tolerate FX volatility. The recent 5bp rate hike in response to the Fed's move reflects this. The RMB may benefit from continued inflows to the local bond market and USD weakness, but the market seems complacent regarding near-term risks.

Turkey: Too Steep to Be True

• Context: The TRY has been depreciating faster than forward rates predict, with a steepening of the cross-currency (CCY) curve.
• Recommendation: Enter a 1m fwd 3m x 9m TRY CCY flattener at 95bp, targeting 50bp, with a stop loss at 115bp.
• Market Outlook: The steepness of the curve is unlikely to be sustained. A slowdown in FX depreciation could lead to flattening pressures, especially at the 1-year point. The CBRT is expected to respond to the depreciation, possibly through rate hikes in April.
• Key Factors: The 3m-12m TRY CCY rates differential has widened to over 125bp, indicating significant tightening expectations. The CBRT is currently using forward sale auctions to manage the currency, and may increase the auction amounts if depreciation continues.

Argentina FX: Weighing Recent Developments

• Context: Portfolio flows into Argentina have slowed, and USD purchases by the non-financial private sector have decreased.
• Recommendation: No structural bullish positions in Argentina are recommended due to the lack of cheap local bonds.
• Market Outlook: The ARS is expected to remain under downward pressure.
• Key Factors: Argentina's international reserves have improved, but USD purchases are driven by structural deficits. The FX market is closely monitored for any signs of continued depreciation.

Brazil: Re-entering Local USD Rates Payer Position

• Context: The gap between market levels and fair value estimates has widened, making the payer trade attractive again.
• Recommendation: Pay the FRA Jan-19 versus Jan-23.
• Market Outlook: The strategy is based on the expectation of a further decline in the USD rate differential.
• Key Factors: The payer trade is seen as a response to the widening gap in USD rates.

Mexico: Cut Position in Udbonos and Increase in Nominal Rates

• Context: The strategy has shifted from real rates to nominal rates.
• Recommendation: Enter a TIIE 2s5s7s fly position (pay the belly).
• Market Outlook: The strategy is concentrated in nominal rates due to their higher yields.
• Key Factors: The TIIE fly is seen as a way to benefit from the steepening of the yield curve.

Key Information

Trade War Impact

• The US announced tariffs on USD 50-60bn of Chinese imports, which has raised concerns about trade relations and market reactions.
• China's response has been limited so far, with retaliatory tariffs of 15-25% on USD 3bn of US imports.
• The trade war is expected to dominate market focus for the next few months, with potential impacts on EM economies and currencies.

Market Reactions

• Asian equity markets and the KRW were negatively impacted by the trade news.
• The TRY has depreciated sharply, with the 1-week realised losses reaching -2%, the worst since July 2017.
• The sell-off in TRY was partly due to the appointment of a new US national security advisor, indicating potential policy changes.

Central Bank Actions

• Hungary: Expected to keep policy rates on hold, with no immediate concerns about the rise in swap rates.
• South Africa: Likely to cut policy rates by 25bp to 6.50%, reflecting the fall in inflation and revised forecasts.
• Turkey: Expected to increase forward sale auction amounts if the TRY depreciation continues, and may hike rates by 25-50bp in April.
• Poland: The MPC meeting minutes are expected to show a dovish stance, possibly leading to a rate cut.
• Czech Republic: The CNB is likely to keep rates unchanged until 2019, targeting EURCZK at 24.50.
• Egypt: Expected to cut rates by another 100bp, following a previous cut in February.

New Recommendations

Market Outlook

• The trade war is expected to have a short-term negative impact on the USD, but could benefit the USD in a risk-off scenario if global trade suffers.
• EM currencies, especially those closely tied to China, are likely to be affected by any significant depreciation of the RMB.
• The focus for the coming week will be on official and market reactions to the US tariffs, with potential rate cuts in South Africa and Egypt, and possible rate hikes in Turkey.

Conclusion

The document outlines a cautious stance for the RMB and a strategy to flatten the TRY CCY curve. It also highlights the potential for rate cuts in South Africa and Egypt, and the likelihood of rate hikes in Turkey. The trade war between the US and China is a major concern, with potential impacts on EM economies and currencies. The market is expected to closely monitor these developments in the coming weeks.