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EM Strategy Summary - 20 July 2018

Core Content Overview

This document outlines the current state of Emerging Market (EM) FX and interest rate strategies, highlighting key themes and positions across Asia, CEEMEA, and Latin America (Latam). It also provides insights into upcoming economic data and central bank decisions that may influence market outlooks.

Main Themes and Key Insights

Asian FX Positioning: Still Short

• FX positioning in Asia has moderated slightly from the last update, but remains skewed towards short positions.
• The focus is primarily on North Asian currencies.
• Short positions in South-East Asian currencies (SGD, MYR, THB, IDR) are smaller, except for the PHP, which has weak sentiment due to rising inflation and a widening current account deficit.
• The INR short position has decreased from its two-year high due to falling oil prices and US administration's emergency oil reserve considerations.

CEEMEA: Still Undervalued, it's CLEER™

• Despite a broad CEEMEA recovery this month, TRY, CZK, PLN, and HUF end-2018 forwards remain undervalued relative to fair value.
• RUB is considered neutral based on the CLEER™ model.

CEEMEA: Trade Winds Ahoy

• The trade backdrop is relatively supportive, even with revised global growth views due to trade disputes.
• Most CEEMEA countries have modest direct trade exposure to the US, so higher tariffs are unlikely to have a significant initial impact.
• The CLEER™ model suggests that the RUB is fairly valued, despite ongoing sanctions risks and high CDS spreads.

Turkey: Economic Slowdown

• Rising unemployment in April indicates a slowing GDP growth, with an expected 4.5% growth in 2018.
• Private demand is slowing, but exports remain strong and the fiscal deficit has expanded.
• A recovery in the current account deficit is expected due to low domestic demand, strong exports, and tourism, though high energy prices are a concern.

Turkey: Current Account Deficit Recovery

• The current account deficit is expected to improve in the coming months.
• High energy prices are a concern for the Turkish economy.

Introducing the Mexican TIIE Factor Model

• The 5y and 10y TIIE tenors are consistently above equilibrium.
• The recent rally in the Mexican swap curve is a catch-up to lower fair values, not an overreaction.

Chilean Pension Fund Flows

• AFPs (Aseguradoras de Fondos de Pensiones) have taken on more risk, as seen in the rise of riskier fund AUM and the fall of conservative fund AUM.
• This shift is attributed to the reduction in short-term rates.

Colombia: IBR Curve and Economic Outlook

• The short end of the IBR curve is pricing in about 105bp of easing by the end of 2019.
• The risk is tilted to the downside, with the 2y tenor almost 30bp above fair value.
• The likelihood of El Niño has increased, which may lead to higher food prices.

Brazil CDS: Rally Not Over

• The strategy recommends extending the target of the Brazil 5y CDS to 200bp.
• A new allocation of USD 5k DV01 (USD 12.5mn) is suggested, with a carry benefit of +4.6bp per month.

Brazil DI: Target Reached

• The FRA Jan22s23s has reached its target.
• The strategy recommends reducing the allocation to USD 5k DV01 reference price @ 12.05% (on-shore).
• The FRA Jan20s21s is maintained with a target of 10.25% and an allocation of USD 30k DV01.

New Recommendations

Trade Review

Interest Rates

• Pay 3m1y HKD IRS: Opened on 10-Jul-18, entry level -48, current -38, target -25, stop -60, P/L +10bp, P/L kUSD 100.
• Receive Colombia IBR 2Y (New!): Opened on 19-Jul-18, entry level 4.76%, current 4.74%, target 4.46% (30bp profit), stop 5.16%, P/L +2 bp, P/L kUSD 40.
• Receive Chile CLPxCAM 18M: Opened on 03-Jul-18, entry level 3.08%, current 3.09%, target 4000.00%, stop -, P/L -1 bp, P/L kUSD 18.
• Receive Brazil DI Jan22sJan23s FRA (Partial Take Profit!): Opened on 07-Jun-18, entry level 13.92%, current 12.07%, target 12.00%, stop 15.50%, P/L +185 bp, P/L kUSD 1086.
• Receive Brazil DI Jan20sJan21s FRA: Opened on 07-May-18, entry level 10.57%, current 10.50%, target 10.25%, stop -, P/L +8 bp, P/L kUSD 225.
• Receive Mexico TIIE 1Y1Y: Opened on 13-Apr-18, entry level 0, current 0, target 0, stop 0, P/L -50 bp, P/L kUSD -1105.
• Pay Mexico TIIE Fly 2Y-5Y-7Y (Pay the belly): Opened on 22-Mar-18, entry level -25, current -28.7, target 30, stop -50, P/L -4 bp, P/L kUSD 81.
• Receive Mexico TIIE 5Y / Pay Colombia IBR 5Y: Opened on 22-May-17, entry level 187, current 262, target 100, stop 300, P/L -76 bp, P/L kUSD -1596.
• Receive Mexico TIIE 5Y5Y spread over US Swap: Opened on 15-Dec-17, entry level 512, current 519, target 470, stop 575, P/L -6 bp, P/L kUSD -97.

FX

• Long USDSGD 3m forward: Opened on 19-Jun-18, entry level 1.353, current 1.369, target 1.38, stop 1.335, P/L 1.18%, P/L kUSD 84.0.
• Buy USDPHP 3mX12m fwd points: Opened on 06-Jul-18, entry level 108, current 105, target 140, stop 90, P/L -2.78%, P/L kUSD 0.0.
• Short EURCLP via 3m NDF: Opened on 09-Jul-18, entry level 772.5, current 775.9694715, target 734, stop 800, P/L -0.45%, P/L kUSD -45.
• Short USDCOP via 3m NDF: Opened on 03-May-18, entry level 2869.0, current 2884.2, target 2725.0, stop 2990.0, P/L -0.52%, P/L kUSD -42.
• Short USDOPEN via 3m NDF: Opened on 18-Dec-17, entry level 3.29, current 3.28, target 3.19, stop 3.35, P/L 0.99%, P/L kUSD 99.
• Long BRL against a basket (CLP, EUR & AUD) via 1m NDF: Opened on 09-Mar-17, entry level 208.46/3.379/2.4005, current 174.11/4.437/2.8053, target 25.00%, stop -, P/L -16.14%, P/L kUSD -807.
• Long BRL against a basket (CLP, EUR & AUD) via 1m NDF: Opened on 07-Jun-16, entry level 192.74/4.018/2.6285, current 174.11/4.437/2.8053, target 25.00%, stop 10.00%, P/L 6.46%, P/L kUSD 646.

Options

• Buy 1-month USDTRY one-touch at 4.30: Opened on 29-Jun-18, entry level 13.00%, current 0.17%, target -, stop -, P/L -12.83%, P/L kUSD -128.
• Buy USDZAR 3m 1x1 call spread (14.40 / 15.10): Opened on 29-Jun-18, entry level 1.06%, current 0.75%, target -, stop -, P/L -0.31%, P/L kUSD -31.
• Long USDBRL OT 3.30 / Mat: 21-Nov-18: Opened on 15-May-18, entry level 21.50%, current 10.53%, target -, stop -, P/L -10.97%, P/L kUSD -274.
• Long USDBRL CS (1x2) 4.00/4.40 maturity: 08-Nov-18: Opened on 10-Apr-18, entry level 0.35%, current 0.81%, target -, stop -, P/L 0.46%, P/L kUSD 230.

Bonds/Credit

• Long Peru Soberanos 2026s unhedged: Opened on 28-Jun-18, entry level 5.3%, current 5.2%, target 5%, stop -, P/L 9.3, P/L kUSD 32.
• Sell Brazil 5Y CDS (Partial Take Profit!): Opened on 19-Jun-18, entry level 283.0, current 229.2, target 200, stop 320, P/L 53.8, P/L kUSD 233.

Total P/L

• Total: -3017
• Rates: -2228
• FX: -610
• Options: -179
• Credit: 33

What's Up Next Week?

Asia

• No major central bank meetings next week.
• Singapore releases CPI figures on 23 July, expected to show higher inflation due to high oil prices.
• South Korea prints GDP figures on 26 July, with growth estimates downgraded.
• G20 meeting on the weekend, likely to discuss trade war implications.

CEEMEA

• Russia's CBR is expected to keep rates on hold on 27 July.
• Market is pricing in ~40bp of tightening over the next 12 months.
• RUB remains range-bound between 61.0 and 64.0.
• Hungary's central bank is expected to keep rates on hold on 24 July.
• TRY may see a rate hike by CBRT on 24 July due to high inflation and deteriorating pricing behavior.

Latam

• Colombia's economic activity data for May is expected on Monday, with a growth rate above consensus.
• El Niño likelihood increased to over 60%.
• Chile's BCCh is expected to remain on hold, but may start removing monetary stimulus in Q3 2018.
• Rate hikes are likely to continue in 2019.

Summary of Positions and Trends

• Asian FX remains short, with focus on North Asian currencies.
• CEEMEA currencies like TRY, CZK, PLN, and HUF are undervalued, while RUB is neutral.
• Brazil CDS and DI strategies are highlighted, with recommendations to extend targets and adjust allocations.
• The document includes detailed data on trade, FX, options, and bonds/credit, with P/L summaries for each.
• Upcoming data and central bank decisions are expected to influence market sentiment in the coming week.