20160304-法国巴黎银行-EM_Strategy_Plus_32页_4mb

EM Strategy Plus Summary - 04 March 2016

Core Focus

The report focuses on the upcoming G10 central bank meetings and the Chinese National People's Congress (NPC), which is set to begin on 04 March 2016. The Chinese authorities are expected to maintain stability in financial markets during the NPC, which could support emerging markets (EM). However, there is a risk that G10 markets may be disappointed if central bank outcomes are less dovish than expected.

Key Themes of the Week

Asian FX Positioning: Unwinding of long USD/Asia

• Investors have reduced long USD/Asia positions over the past two weeks.
• Short USD positioning has increased against the IDR, INR, and PHP.
• The aggregate USD/Asia position is now close to neutral, indicating light positioning.
• Long USDCNH and USDTWD positions have decreased, while USDKRW has also moved towards neutrality.

CEEMEA: A Fragile Situation

• High-beta countries are particularly vulnerable to threats to EM asset recovery.
• A recommendation to pay ZAR 1y1y and receive 1y is suggested.

Switch from South Africa $ long end into Turkey

• South African long-end bonds are tight compared to Turkey's long-end and other spreads.
• A trade recommendation to sell South African $ '41s and buy Turkey $ '41s is provided.
• EURTRY is seen as having upside potential, with a recommendation to buy a 2-month 1x2 EURTRY 3.30-3.40 call spread.

BRL: Re-adjusting the Option Strategy in Place

• The probability of USDBRL reaching 4.40 by 10 June 2016 has decreased.
• USDBRL's fair value is calculated at 3.843.
• A recommendation to sell a USDBRL call spread at 4.20 and 4.40 (1x1) is made.

Argentina: Price Implications of a Holdout Agreement

• EUR-denominated bonds are more attractive due to higher pick-up.
• Discounts are preferred over Pars for investors expecting a quick agreement in US courts.
• EUR Discount bonds are recommended as a trade.

Colombia's Coltes 24: Spread is Still Too High; Going Long Again

• Colombian TES is considered over-extended due to lower oil prices, tighter monetary policy, weaker COP, and negative fiscal developments.
• A recommendation to go long Coltes 24 (spread over US Treasury) is made.

New Recommendations

What to Look Out For in the Coming Week

In Asia

• Malaysia (9 March) and Korea (10 March) will announce rate decisions.
• The report expects a 25bp policy rate cut in Korea.
• The Bank of Malaysia may cut reserve requirements due to a contraction in the onshore deposit base.
• China will release February trade balance, CPI, PPI, new loans, social financing, and M2 growth data.
• Taiwan will release February trade balance and CPI data.

In CEEMEA

• European inflation breakeven rates are rising, leading to a steepening of the euro curve.
• The report recommends PLN curve flatteners.
• Russia is seeing asset performance driven by crude oil price recovery.
• A recommendation to buy USDRUB on any fall below the 70 level is made due to an asymmetric risk-reward profile.
• South Africa is the highest beta country in CEEMEA, with a recommendation to stop out of the 1y1y ZAR versus USD position.

In Latam

• Brazil has seen political developments and strong performance in local markets.
• Mexico is resilient, with the short end of the IRS curve pricing in over 50bp in hikes.
• Peru is expected to deliver a 25bp policy rate hike due to hawkish communication and above-target inflation.

Trade Review

• Buy 12m USDCNH covered call (long 12m USDCNH position and short 1y 7.50 USDCNH call).
• Buy 6m USDMXN digital put 17.50.
• Buy 1y USDMXN digital put 18.00.
• Buy 6m USDBRL call spread 4.00/4.40 (1:2).
• Buy Turkey $ 41s, sell South Africa $ 41s.
• Buy Turkey $ 21s, buy Turkey 5y CDS.
• Buy Coltes 24s SOT.
• Buy EUR Discount bonds.

Summary of Key Data

• USDCNH 3m implied volatility is falling due to stable Chinese FX.
• Asian FX positioning has turned neutral.
• USDSGD and USDMYR show trends with Z-scores over the past two weeks.
• USDINR has also shown trends with specific Z-scores and FX indicators.

This report is classified as non-independent research and is for marketing communication purposes.