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EM Strategy Weekly Summary - 17 March 2017

Core Content Overview

This document provides a detailed summary of emerging market (EM) strategy recommendations and market analysis for the week of 17 March 2017. It includes insights from various regions, focusing on interest rates, foreign exchange (FX) strategies, and credit opportunities. The analysis is conducted by the EM Strategy Team of BNP Paribas, with contributions from multiple strategists across different branches and countries.

Main Regions and Themes

Hong Kong: Carpe diem!

• USDHKD FX forwards have shown a sharp widening in the cross-currency basis, indicating a potential revaluation of the HKD.
• The likelihood of de-pegging the HKD from the USD is extremely low, but the current dislocation presents a quasi-arbitrage opportunity through FX options.
• The USDHKD call spread (7.70/7.80) is recommended with a net premium of 420 HKD pips, resulting in a breakeven rate of 7.7420.
• If the HKD remains pegged, the trade could yield a minimum gain of 80 pips and maximum gain of 580 pips.
• The downside risk is limited to the premium paid for the options.

SG-USD Spreads: Time to Take Profit

• The receive 5y5y SGD versus USD IRS recommendation has performed well.
• The team takes profit at the current level (28bp), but would consider re-entering if the spread widens significantly.
• The spread compression trend remains in place due to factors such as the end of the MAS easing cycle, deleveraging in the banking system, and cheap USD funding via FX swaps.

Turkey: The CBRT Tightens Policy

• The CBRT raised the late liquidity window (LLW) rate by 75bp to 11.75%, in line with market expectations.
• The average repo funding rate increased to 11.35%, up from 10.8% before the meeting.
• Despite the recent performance, the TRY still has room for further recovery against EM peers.
• The swap auction rate was increased to 11.75%, preventing short-term swap rates from falling below the LLW rate.

Latam FX: Reinforcing Bullish Strategy on Mexico

• The MXN is considered the most undervalued currency in Latin America.
• Positive comments from the US trade adviser and the introduction of a new FX intervention tool support the bullish view on the MXN.
• The team has increased its long position in USDMXN 12-month forwards, with a total allocation of USD 15mn.
• The target for the trade remains at 20.525, with a stop loss unchanged.

Colombia: Local Debt Monthly Monitor – February 2017

• Non-resident holdings of Colombian local public debt increased slightly, but their relative share fell from 24.7% to 24.4% due to a larger increase in domestic holdings.
• Non-resident debt holdings represent 42.6% of international reserves.
• The team has increased its flattener position in the Colombia IBR 1y-3y curve.

Key Recommendations

FX Strategies

• Buy USDHKD call spread (7.70 vs. 7.80) with a notional of USD100m.
• Short USDMXN via 12-month forward at 20.525, with a total allocation of USD15mn.
• Long USDARS 1y NDF against short USDARS 3m NDF with a notional of USD10mn.
• Long COP against a basket (EUR & CLP) via 1m NDF with a notional of USD5mn.
• Long USDARS 2y NDF against short USDARS 1y NDF with a notional of USD10mn.

Interest Rates

• Take profit on the receive 5y5y SG versus US IRS trade (27bp gain).
• Close short SGD versus CNH trade, as conviction has weakened.
• Receive 2Y1Y THB NDIRS with a notional of 10k USD.
• Pay 1Y1Y RUB XCCY with a notional of 5k USD.

Credit Strategies

• Switch from Saudi Arabia $46s to Qatar $46s with a notional of 5k USD.
• Long Jun19 UDIBonos at +62bp and +68bp, indicating a re-entry into real rates.

What's Next Week?

Asia

• No major domestic events are expected.
• Central banks of the Philippines and Taiwan will hold policy meetings, but are likely to keep rates unchanged.
• Asian markets are expected to follow global risk appetite and US rate trends.

CEEMEA

• The Central Bank of Russia (CRB) will meet on 24 March, and is expected to keep rates on hold.
• The 1y1y USD/ZAR spread is at 520bp, close to its January 2015 low, suggesting a potential nominal stabilisation of USDZAR.
• The TRY has reversed underperformance but still has room to strengthen.

Latam

• Brazil will release mid-month inflation data and an external sector report, which may support the BRL.
• Mexico will release inflation data, and the team expects the MXN to continue strengthening.
• Colombia is expected to cut policy rates by 25bp, in line with the IBR curve's expectations.

Summary of Trade Positions

Total P/L Summary

• Total P/L: +3596 kUSD
• Rates: +55 kUSD
• FX: +2877 kUSD
• Options: +713 kUSD
• Credit: -50 kUSD

Conclusion

The report outlines a range of strategies and market outlooks for the EM space, with a focus on quasi-arbitrage opportunities, interest rate trends, and currency movements. The team is reinforcing bullish positions on the MXN and Colombia, while taking profit on some existing trades. The HKD and USDZAR are expected to remain pegged, limiting the risk of de-pegging. The TRY is expected to recover further despite recent performance, and the CBRT is maintaining a tight liquidity stance. The Colombia market shows a mixed trend in foreign holdings, with non-residents still playing a significant role.