20170113-法国巴黎银行-EM_STRATEGY_PLUS_36页_3mb

EM STRATEGY PLUS Summary - 13 January 2017

Core Content

This document provides a comprehensive overview of the performance and outlook for Emerging Markets (EM) FX, credit, and interest rate strategies as of early January 2017. It highlights key market movements, policy changes, and strategic recommendations across various regions, including Asia, CEEMEA, and Latin America (Latam), with a particular focus on China, Turkey, and Brazil.

Main Themes and Recommendations

Asia

• Take profit on short SGD vs IDR: The trade initiated last year at an all-in rate of 10,320 has seen a decayed contract price of around 9870, resulting in a net gain of 4.5%.
• Take profit on CNH CCS receiver: The recommendation to sell 12mX24m USDCNH forward points at current levels (circa +2180) has been closed, with a gain of 0.39%.
• CNH-CNY Spread: The spread remains wide, but liquidity conditions have eased. The CNH market is in a state of dysfunction due to restrictions on cross-border RMB flows.
• China FX: The liquidity crisis has ended, but liquidity remains tight. The CNY has appreciated slightly, while the CNH has appreciated more, creating a gap. The CNY is expected to weaken again, forecasting a rate of 7.40 by year-end.
• Debt-for-Equity Swaps: These are one of several tools used to reduce corporate leverage in China, particularly for SOEs in overcapacity industries. The government is focused on lowering corporate debt, especially from SOEs.

CEEMEA

• Take profit on South African 5y5y receiver: The trade is recommended to position for a possible flattening of DM curves spreading to EM curves.
• Turkey CDS: After being stopped out in December, the trade has been re-opened at 290bp. The FX weakness in Turkey has credit implications, and we recommend buying 5y CDS.
• Inflation and PPI: Inflation is expected to rebound in CEEMEA, with PPI data possibly supporting this view. Political developments in South Africa may also impact the region.

Latam

• Brazil: The central bank has cut interest rates, and we recommend being received in the Jan DI 23s. The USDBRL is expected to fall below 3.0 in the coming quarters.
• Mexico: The central bank may need to seek IMF support due to insufficient international reserves. The currency has been a key focus for EM strategies.
• Chile: The central bank is expected to cut the policy rate by 25bp, which may not have a significant impact on the short end of the curve.

Key Information

FX Performance

• Russia and Turkey: Both currencies have fallen to new record lows against the USD.
• China: The CNY and CNH have strengthened, but the CNH-CNY spread remains wide.
• Brazil: The currency has been a strong performer, with the central bank cutting rates significantly.
• Mexico: The currency has been under pressure, with international reserves possibly insufficient in the event of a sudden stop.

Credit and Risk Management

• Turkey CDS: A long Turkey CDS trade is recommended due to FX weakness and possible rating downgrades.
• Corporate Debt: China's corporate debt is a major issue, especially in SOEs. Debt-for-equity swaps are being used to reduce leverage, but the market remains cautious.

Policy and Market Outlook

• US Policy: Uncertainty remains regarding US trade policies, particularly with regard to Russia and Mexico.
• China Policy: The Central Economic Work Conference emphasized reducing corporate leverage, with debt-for-equity swaps being one of the tools.
• Latin America Policy: Mexico's central bank may need to seek IMF support, while Brazil's central bank is expected to continue rate cuts.

Strategic Highlights

• Asia: Profit-taking on SGD vs IDR and CNH CCS receiver trades.
• CEEMEA: Positioning for inflation and PPI trends, with a focus on South Africa and Turkey.
• Latam: Continued rate cuts in Brazil, potential IMF support for Mexico, and a cautious approach to Chile's rate cuts.

Trade Review

• Interest Rates: Multiple trades have been closed or partially closed, with a focus on receiving ZAR 5y5y and long USDARS 2m NDF against short USDARS 12m NDF.
• FX: Key trades include selling SGDIDR NDF and USDCNH forward points, with a focus on the CNH-CNY spread.
• Options: Various options trades have been initiated or closed, with a focus on USDILS call butterfly and USDBRL call.
• Credit: The Turkey CDS trade has been re-opened, with a focus on the CDS basis and FX implications.

Market Outlook

• Asia: Expectations for Malaysia to raise rates in Q2 or Q3, and for India's trade data to show the impact of rising oil prices.
• CEEMEA: Inflation is expected to rebound, with South African CPI and PPI data being key indicators.
• Latam: Brazil's inflation data and Mexico's international reserves will be important for the coming week.

Conclusion

The EM markets have experienced a tumultuous start to 2017, with significant movements in FX and credit. Strategic recommendations focus on profit-taking in certain trades, positioning for inflation, and monitoring policy changes in key countries. The CNH market remains in a state of dysfunction, while China's corporate debt reduction efforts continue. The overall outlook suggests a mix of opportunities and risks, with a focus on fundamental analysis and market positioning.