20140516-法国巴黎银行-EM_Strategy_Plus_17页_1008kb

EM Strategy Plus Summary - 16 May 2014

Core Content Overview

This report outlines the key views and asset allocation strategies for emerging market (EM) investments, focusing on interest rates (IR), foreign exchange (FX), and credit (Credit) markets. It highlights the impact of potential ECB quantitative easing (QE) and the evolving dynamics in the Chinese rates market.

Key Views and Asset Allocation

FX Recommendations

• TRY (Turkish Lira): Recommend long 1s5s x-ccy steepeners. Expect a 50bp rate cut from the CBRT, and the currency's appreciation is likely to be limited by ECB QE and inflation.
• ZAR (South African Rand): Recommend receiving ZAR FRA 2x5, targeting 5.80% with a stop-loss at 6.5%. Expect the SARB to keep rates on hold due to weak macroeconomic data.
• MYR (Malaysian Ringgit): Recommend long MYRTWD, reversing the short MYRTHB position. The market is viewed as being in a transition phase with increased sensitivity to monetary policy.
• USD/HUF (Hungarian Forint): Recommend long USDHUF spot and 2m EURHUF call spreads. The HGB curve is expected to remain flat with a long position on the belly.
• CLP (Chilean Peso): Maintain a long CLP position against USD and NZD. The Q1 GDP release is a key event to monitor.
• BRL (Brazilian Real): Remain receivers on the belly of the DI Jan'15/16/17 curve. The 1s5s steepener is also recommended.
• USDCNY (Chinese Yuan): Sell 3m USDCNY NDF, targeting 6.165 with a stop-loss at 6.220.

Local Debt and Rates

• Indonesia (IDR): Overweight IDR bonds and long IDR FX positions. The market is expected to focus on macro reforms.
• Poland (PLN): Recommend buying POLGB Jul'18, targeting 3.50%. The belly of the curve is expected to flatten.
• Hungary (HUF): Recommend buying HGB 19/A (FX hedged), targeting 3.70%. The belly of the curve is expected to flatten.
• Romania (RON): Recommend buying ROMGB Jul'17, targeting 3.50%. The curve is expected to flatten further.
• Russia (RUB): Recommend long 1s5s x-ccy steepener. The x-ccy curve is inverted, but capital outflows are expected to ease.
• Thailand (THB): Recommend front-end steepeners (1y3y) and back-end flatteners (2y10y) in the IRS curve. Maintain a modest overweight.
• Brazil (BRL): Avoid the back end of the curve; trade the flatness of the belly. Maintain a receiver position on the belly of the DI curve.
• Mexico (MXN): Positive on the currency in the longer term, but cautious on short-term volatility.

Credit and Options

• Credit: Recommend switching from Brazil'23 to Colombia'23, and buying 5y Russian CDS.
• Options: Buy 6m6m SGD FVA, 2m EURHUF call spreads, 3m USDTRY RKO, and sell USD/CNH call with strike 6.90.

Trade Review

• Active Positions:
  • TRY 1s5s x-ccy steepener (targeting 45bp)
  • HGB 19/A (target extended to 3.70%)
  • ROMGB Jul'17 (target extended to 3.50%)
  • ZAR FRA 2x5 (targeting 5.80%, stop-loss at 6.5%)
  • RUB 1s5s x-ccy steepener (targeting -40bp, stop-loss at -100bp)
• Closed Positions:
  • Sell 6m MYRTHB NDF (closed at 10.055)
  • Buy TURKEY'41 vs sell 3.2xTURKEY'04/18
  • Buy 5y RUSSIA CDS (stopped on 12 May)
  • Switch out of SOAF'41 into ROMANI'44

EM Focus: Stress Test It Is

• The first anniversary of the Fed's tapering discussion has led to increased market stress, particularly in Europe.
• ECB QE is likely to continue, which supports long duration and FX volatility strategies.
• The Chinese rates market is becoming more important for macro investors as it reflects structural changes in the economy.
• The Chinese rates market is still in transition, but the sensitivity of the economy to interest rates is increasing.
• The PBoC is moving towards a price-based monetary policy regime, with the repo rate being the preferred policy rate for now.
• The Chinese bond market is still dominated by indirect financing, which limits the effectiveness of monetary policy transmission.
• Financial innovation and reforms are expected to increase the sensitivity of the rates market to macroeconomic conditions.

Why Chinese Rates Matter

• Global macro investors have traditionally avoided the Chinese rates market, but this view is becoming outdated.
• The Chinese economy is becoming more sensitive to the price of money due to structural trends and interest rate liberalisation.
• The Chinese rates market is still in transition, but it is gaining more attention as it becomes a more efficient way to express macro views.
• The PBoC's policy framework is evolving, with a shift from quantity-based to price-based mechanisms.
• The repo rate is expected to play a more prominent role in guiding monetary policy in the short term.
• The introduction of new financial products is making liquidity in the Chinese rates market more complex and less transparent.

Conclusion

The report emphasizes the importance of long duration and FX volatility in the current market environment, driven by the potential for ECB QE. It also highlights the growing significance of the Chinese rates market in expressing macroeconomic views and the need for investors to adjust their strategies accordingly.