GEMs FI & FX Strategy Weekly:Summer tail breeze
Global Outlook: trickling back in
EM assets have rallied back after the sharp selloff that followed increasedexpectations of Fed tapering. Econometric estimates suggest this may translateinto renewed EPFR inflows into EM in the next two weeks. The duration of therally remains in question, however, given our house views of upside risks to theUSD and Treasury yields. Meanwhile, downside risks to growth appear to bemounting, especially for current account deficit countries such as Brazil, India,Indonesia, Turkey and South Africa. (A. Ades, I. Smart; page 2)
Asia: how to trade RBI measures
We remain bearish INR, and continue to recommend long NDF points andposition for USD/INR to reach the 62-63 level by the end of 3Q. On rates, bondsshould remain under pressure, but we expect OIS to outperform as someprobability of liquidity stress scenario is already priced in.
(A. Leung; page 6)
EEMEA: Russia is the one-eyed king
Russian OFZs and RUB carry remain our preferred local market trades. We alsomaintain a receiving bias in the front end in Hungary and Poland. In the highyielders,we remain overweight South Africa versus Turkey. (D. Hauner; page 8)
LatAm: currency reanimation
We maintain our overweight exposure to the Mexican peso and Brazilian real, andunderweight exposure to the Chilean peso. Recent comments by Ben Bernankesuggest US interest rates could remain range bound in the near term, eliminatinga recent source of risk for EM FX. (C. Irigoyen; E. Aguirre; page 10)
What we like
FX: Our preferred currency longs continue to be MXN on improving fundamentals in2H13, BRL and PEN due to support from currency intervention and improvedcarry in the former. On the bearish side, we continue to like shorting INR evenafter liquidity tightening measures and CZK given increased prospects for FXintervention.
LDM: Our favorite receivers are Jan15 CDI futures in Brazil, 1y COP/IBR swapsin Colombia, 1y TIIE swaps in Mexico and 2y NDIRS in Thailand due tomispriced front ends. We also like long Russia OFZ ‘18s due to declininginflation and eventual central bank easing. Our favorite payer is 5y in Koreadue to the improved growth outlook from BoK.
EXD: We expect yields to be range bound this week and outflows to slow down oreven reverse. This supports IG credits but stay nimble in liquid assets. Wesee value in some long ends where curves are steep: Brazil, Mexico andHungary in particular. We are OW Hungary on valuation and UW Russia,Turkey and Ukraine on high financing needs, OW Venezuela, UW Argentina