20151113-法国巴黎银行-EM_Strategy_Plus_26页_3mb

EM Strategy Plus Summary - 13 November 2015

Core Content

The document discusses the current state of USD liquidity and its implications for emerging market (EM) currencies. It highlights that while the cross-currency basis (xccy) in developed markets (DM) has widened sharply, there is no sign of financial distress in EM. This is attributed to factors such as local interbank disintermediation, regulatory issues, and the expectation of policy divergence in the G7. The document also outlines trade recommendations and updates on FX and rates positions across Asia, CEEMEA, and Latin America (Latam).

Main Themes and Key Points

USD Shortage – This Time It's Different?

• Cross-Currency Basis: The xccy basis in DM has widened, historically a sign of financial distress in EM.
• No Financial Distress in EM: Despite high short-term debt roll-over risk and reliance on global bank lending, EM is not experiencing a surge in USD demand.
• Reasons for No Distress: Heightened demand for USD in DM is due to local interbank disintermediation, regulatory issues, and expectations of G7 policy divergence. Some EM countries may have reduced vulnerability to USD funding shocks due to rising local USD deposits and falling FX loan-to-deposit ratios.
• Vulnerable Countries: Countries with low reserves relative to short-term external debt, such as Argentina, Czech Republic, South Africa, Turkey, and Malaysia, are more exposed.

Asia: Update of FX & Rates Recommendations

• Risk Shift: With increased likelihood of a Fed rate hike in December, USD strength is expected to remain a key factor.
• Trade Adjustments:
  • Closed long USDKRW and short MYR versus IDR recommendations.
  • Closed 5y CNY NDIRS receiver and long IDR bond position.
• New Bias: To add to long USD/Asia exposures, as the window for policy easing in Asian markets is closing.
• RMB Pressure: Increasing pressure on China to allow more flexibility in the RMB could have negative spillover effects on Asian currencies.

Korean Receivers: Keep Your Powder Dry

• Korean Rates: Sharp sell-off driven by US rate hikes, BoK's less-dovish tone, and unwinding of offshore received positions.
• Recommendation: Caution advised against entering receivers at current levels due to risks such as normalisation of term premia, potential FX depreciation, and attractiveness of US Treasuries swapped into KRW.
• Future Outlook: Expect another rate cut in Q1 2016 due to external sector drag and inflation undershoot.

Asian FX Positioning: Largely Unchanged

• Investor Positioning: Aggregate investor positioning in USD/Asia remains largely unchanged, with an average moderate long USD position of +0.5 on a scale of +3 to -3.
• RMB Trends: The RMB's trade-weighted value is approaching previous highs, increasing pressure for more flexibility.

CEEMEA: Winter Adjustments to Our Portfolio

• Focus on ECB and EUR Weakness: Performance of CEE assets will be influenced by ECB easing and EUR weakness.
• Poland: Recommend receiving 2y2y PLN due to high real rates and risk of abrupt PLN appreciation.
• Hungary: Recommend receiving 5y5y HUF with a target of 3.00% and a stop-loss at 4.10%, while buying the 23A HUSB.
• South Africa: Closed 1y RUB ccy receiver for a profit and highlighted pay ZAR 1y1y versus receive USD 1y1y trade.

Latam Curves: Mind the Co-movement with US Corporates

• Mexico: TIIE curve is too steep compared to other EM and US benchmarks. Recommend flattening the curve by receiving 2s5s.
• Brazil: Despite speculation about finance minister replacement, the premium on local assets has fallen due to positive investor sentiment.
• Colombia: COP depreciation in response to oil price decline may lead to further rate hikes.

Key Recommendations

Conclusion

The document concludes that while the USD shortage is significant in DM, it is not causing financial distress in EM. However, there is a risk that USD liquidity issues could spread to EM, and certain countries may be more vulnerable. The authors recommend holding positions that are relatively insensitive to such developments or that would benefit from them, and advise caution in entering receivers in Korea due to potential market volatility and macroeconomic risks.