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EM Strategy Plus Summary - 19 August 2016

Core Content

The document provides a comprehensive analysis of emerging market (EM) strategies and market outlook for the upcoming week, with a particular focus on FX and interest rate positions. It outlines the expected impact of the US Federal Reserve's policy decisions, especially Janet Yellen's speech at Jackson Hole, and highlights the shift in market sentiment towards Asian currencies.

Main Themes and Key Points

1. Focus on Jackson Hole

• Markets will closely watch the US Federal Reserve's policy decisions, particularly Janet Yellen's speech on 26 August and the non-farm payrolls release on 2 September.
• Expectations for Fed rate hikes are likely to be re-priced, leading to USD volatility and potential rallies.
• EM currencies, especially high-yielding ones, are expected to benefit from the weakening USD.

2. Asian FX at Pivotal Juncture

• USDJPY trend moves often lead the trend in other Asian currencies.
• The long USD trade is expected to unwind further, with Asian currencies potentially rising against the USD.
• The BoT's current account surplus and FX intervention suggest potential for THB appreciation if intervention is reduced.

3. Asian FX Positioning

• Short USD positions have been tentatively increased against Asian currencies.
• INR and IDR remain the most popular Asian currencies.
• The trend reflects low-conviction and momentum-chasing behavior, but aggregate positioning is not extreme.

4. MENA Sovereign Credit

• Positive outlook on EM credit, especially in the MENA region.
• Investors are expected to be attracted to higher-yielding names.
• Tunisia is highlighted as a preferred credit name in the region.

5. Russia

• RUB is supported by rising oil prices, but increased geopolitical tensions may lead to more volatility.
• Paying forward starting RUB cross-currency (ccy) positions is recommended due to the positive carry and potential for rate cuts.
• The curve is pricing in 250bp of cuts within two years.

6. Turkey

• The MPC is expected to cut the upper bound of the interest rate corridor by 25bp, narrowing the spread to the 1-week repo rate to 100bp.
• Treasury auctions will maintain pressure on the bond market, especially if Fitch revises the rating outlook to negative.

7. Latam

• Introduction of a new risk appetite model for EM countries.
• No new trade recommendations for Latam this week.

New Recommendations

Key Market Outlook

Asia

• Economic calendar is relatively light, with limited guidance expected.
• July CPI and industrial production data will be released for several countries.
• Asian currencies are showing strength and may continue to appreciate against the USD.

CEEMEA

• RUB is supported by oil prices but faces increased volatility.
• PLN and HUF have depreciated against the EUR, but this is attributed to EUR strength.
• Expectations for further rate cuts in Thailand and potential hikes in the US are highlighted.

Latam

• Brazil's CPI and monetary policy meeting are key events.
• Mexico's GDP data and central bank minutes will be important for market direction.

Conclusion

The report emphasizes the shift in market sentiment towards Asian currencies and the potential for continued USD unwinding. It also highlights the importance of monitoring central bank policies and market positioning in the EM space, with specific recommendations for FX and interest rate trades. The overall strategy is to capitalize on the weak USD and the potential for EM currency appreciation and rate differentials.