EM FX markets: Positive view for 2018 - Nomura
As we approach 2018, there is a broad consensus positive view on the global economic environment, points out the research team at Nomura.
“Our economics team believes we are currently in a ‘sweet spot’ of steady global growth and subdued inflation (especially in the US), which could continue through H1 2018. Risks (for EM markets) from Trump administration trade/fiscal policies and/or a significant rise in geopolitical (Middle East or North Korea) concerns seem remote for now and have lacked any indication of imminent market impact.”
“Overall, with the relatively sanguine environment likely to remain intact into 2018, our core FX recommendations include long THB and KRW (versus USD) and long CE-3 (versus USD). In rates, we receive Jan 2019 Brazil DI and 5Y SGD (versus a US 5Y).”
“However, EM markets appear subject to local idiosyncratic factors (some common local themes include favourable current account/flow dynamics, FX valuations, potential central bank tightening) and significant global risks. We see the two most pressing as China financial/macro stability concerns and a pricing in of more US rate hikes in 2018.”
“Based on these views, we suggest some relative value FX trades/hedges and rates curve trades. These include short MXN/CLP (NAFTA risk for MXN versus CLP positive macro/politics), long KRW against short TWD and long USD/CNY spreads, and long USD/SGD to hedge our short USD/THB (more details in the trade sections below). In rates, we recommend curve trades such as a 2s5s CNY NDIRS steepener (stable liquidity and higher term premia from deleveraging) and a 2s10s PLN IRS flattener (rate hike cycle).”