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Emerging Weekly
CIS 2010 Outlook
Best Wishes for 2010! Kazakh industrial production has rebounded
thanks to oil output
The next weekly will be published on 8 Jan 2010
25 % y/y 3ma
Q Editorial oil production
Total
20
The oil price is a key driver for the RUB and KZT. Appreciation
prospects are however limited for both currencies. For the RUB, 15
Q FX trade summary
Source: SG Cross Asset Research, Ecowin
We recommend going short CZK/HUF with a target of 10.25. We
recommended this trade a couple of times in the past couple of
month with success. We think the price looks attractive once again.
Moreover, we believe CZK will again underperform with the easing in
Numerous risks weigh on Ukraine’s fiscal deficit
risk aversion. The quant team also sees value in this trade (see latest
12
FX Quantsight). As a short-term trading idea, we also recommend % of GDP
going short EUR/HUF, to position for an easing in risk aversion in the general government deficit
10
inc. Naftogaz and banks recapitalisation costs
coming sessions that will bring EUR/HUF back down to 265.
FX spot strategies:
Cross Position Date Entry Target Stop Current P/L week * P/L total
New positions this week
CZK/HUF Long 11-Dec 10.59 10.25 10.76
EUR/HUF Short 11-Dec 273 265 278
Old positions
MXN/CLP Long 26-Nov 38.00 42.00 36.00 38.29 -3.41% 0.76%
KRW/SGD Long 26-Nov 0.12 0.1290 0.1155 0.12 -0.33% -0.67%
KRW/CLP Long 26-Nov 0.4257 0.4500 0.4135 0.4266 -1.95% 0.21%
USD/PEN Short 12-Nov 2.8725 2.7500 2.9310 2.8765 -0.09% -0.14%
TRY/ZAR Long 11-Nov 4.98 5.30 4.82 5.03 1.03% 1.00%
EUR/KRW Short 28-Oct 1760 1665 1850 1716 1.32% 2.50%
EUR/PLN Short 9-Oct 4.24 4.00 4.36 4.15 -1.32% 2.12%
USD/ILS Short 25-Sep 3.77 3.62 3.84 3.77 -0.13% 0.00%
Positions closed
FX options strategies:
Cross Position Structure Date Spot Entry ATMF Vol Expiry Cost Valuation P/L week * P/L total
Entry (close)
New positions this week
Old positions
USD/MXN Short vol swap 23-Oct 12.89 15.5 25-Jan-10 0.00% 1.98% -0.54% 1.98%
implied
USD/TRY Long implied vol swap 23-Oct 1.4648 14.3 25-Jan-10 0.00% -2.53% -0.10% -2.53%
USD/BRL ** Short vol double no 19-Nov 1.7268 17.9 20-May-10 2.50% 2.61% -0.05% 0.11%
touch
Positions closed
USD/BRL ** Short vol double no 30-Oct 1.7248 19.2 19-Nov-09 3.33% 8.02% 1.95% 4.69%
touch
USD/MXN Short risk 9-Oct 13.26 14.7 9-Nov-09 0.00% 0.00% 0.09% 0.00%
reversal
2 11 December 2009
Emerging Markets Weekly
South Africa: Maintain 1y1y forward receiver. This trade has held up relatively well despite rand weakness. We
maintain it as it plays well with our theme – monetary cycles favour CEEMEA rates over Asia/LatAm peers (see Fixed
Income Strategy page). We still think cuts are possible in South Africa and carry is attractive. Target: 7.75%.
Hungary: Hold 13/D. This position has returned some gains on recent currency weakness. Maintain this position as
technicals are still positive for Hungarian local bonds into early 2010.
Poland: Maintain PLN-EUR 5y5y forward. We do not expect any surprise on the convergence front for Poland (and
also other CE3) during H1 2010. However, we favour Poland from a fundamental perspective and see any widening of
the PLN-EUR 5y5y forward spread above 130bp as an opportunity to increase the position (see CEEMEA local rates
strategy in FI Outlook 2010)
Position Date Entry Unit Target Stop Current P/L week P/L total Est. 3m
(bp)* (bp) carry (bp)
Existing positions
PLN - EUR 5y5y forward 30 Mar 160 bp 60 130 128 -1 32 -1
Receive ZAR 1y1y forward 21 Jul 8.15 % 7.75 8.40 8.07 -10 8 20
Receive ZAR 2s5s10s PCA barbell Ratio:
15 Sep -50 bp -70 -40 -60 -4 10 3
0.62:2:0.47
Pay HUF 3x6 FRA^ 18 Sep 6.35 % 7.00 6.10 6.30 -2 -5 --
Switch TURKGB11 8/14 into R201 16 Oct -56 bp -180 -160 -172 0 116 --
11 December 2009 3
Emerging Markets Weekly
4 11 December 2009
Emerging Markets Weekly
Latin America
During the week Period Previous SG Forecast Consensus
Argentina Budget Balance NOV 702.7M na na
Brazil CAGED Formal Job Creation NOV 230956 na na
11 December 2009 5
Emerging Markets Weekly
ASIA
During the week Period Previous SG Forecast Consensus
China New Yuan Loans NOV 253.0B na 250.0B
Money Supply - M0 (YoY) NOV 14.10% na na
Money Supply - M1 (YoY) NOV 32.00% na na
Money Supply - M2 (YoY) NOV 29.40% na 29.00%
Actual FDI YTD YoY NOV -12.60% na -9.10%
South Korea Export Price Index (YoY) NOV -16.50% na na
Export Price Index (MoM) NOV -3.00% na na
Import Price Index (YoY) NOV -15.30% na na
Import Price Index (MoM) NOV -1.10% na na
Indonesia Money Supply - M1 (YoY) OCT 2.20% na na
Wholesale Price Index (YoY) OCT na na na
Money Supply - M2 (YoY) OCT 12.20% na na
Total Local Auto Sales NOV 52241 na na
Total Motorcycle Sales NOV 613979 na na
Thailand Total Car Sales NOV 53271 na na
South Korea Department Store Sales YoY NOV 11.40% na na
Discount Store Sales YoY NOV 4.50% na na
6 11 December 2009
Emerging Markets Weekly
BBB- Negative Hungary 21 Dec 09 -50 6.50 We expect 50bp of rate cuts by year end -95
A Stable Czech Rep. 16 Dec 09 unchanged 1.25 50% probability of a cut at next meeting -13
BB+ Negative Romania 05 Jan 10 unchanged 8.00 No rate cuts before next year NA
BBB Negative Russia NA -50 9.00 We expect there to be a total of 50bp cuts left NA
BB- Stable Turkey 17 Dec 09 -25 6.50 We expect a 25bp cut by year end 0
Source: SG Cross Asset Research, KB, Bloomberg, Reuters (as at 10 Dec 09 close.). ^S&P ratings are used
80 8
60 7
40
FRA - premium (bp)
6
20
0 5
-20 4
-40 3
-60
2
-80
-100 1
-120 0
PLN HUF CZK ZAR ILS TRY
11 December 2009 7
Emerging Weekly
115
Sources: SG Cross Asset Research, Central Bank of Russia
110
8 11 December 2009
Emerging Markets Weekly
triggered some discussion about capital controls. We do reduction has been pivotal in the stabilisation of the FX
not expect such measures to be implemented. The Russian market and will clearly be a positive factor for UAH.
authorities have outlined less crude measures such as However, the key variable for FX will be fiscal policy in the
increasing reserve requirements, caps on banks’ foreign coming months. Although Ukraine’s public debt level is
currency positions and taxes on profits generated by relatively low, any widening of the fiscal deficit would have
selected transactions. Meanwhile, FDI inflows are likely to very negative implications for the UAH given the absence
remain low unless the business environment becomes of capital inflows. The IMF programme has been damaged
friendlier for foreign investors. by President Yushchenko’s decision to increase the
minimum wage by 33%. The Fund did not disburse the
Forecasts
fourth tranche of $3.8bn in mid-November. The return of
Mar 10 Jun 10 Sep 10 Dec 10 IMF money is crucial but unlikely before the presidential
Basket/RUB 35.10 35.00 35.50 35.80
election. The difficulties encountered by Naftogaz are
another potential source of risk for the fiscal deficit. The
USD/RUB 28.20 27.80 28.50 29.50 gas company is experiencing difficulties being paid by its
EUR/RUB 43.50 43.80 44.00 43.50 clients and is struggling to pay Gazprom, which is fuelling
tensions with Russia. Finally, further capital injection into
Source: SG Cross Asset Research
the banking sector may be needed given the magnitude of
NPLs, which represent 30% of total loans. The IMF expects
UAH: to weaken substantially in 2010 the deficit to be contained at 3.0-4.0% of GDP in 2010 after
6.0%, but the risk of a wide slippage persists. Moreover,
Very gradual economic recovery. Signs of an economic the temptation to monetise the fiscal deficit exists. The
recovery have emerged and GDP will grow again in 2010, materialisation of such a risk would be very negative for
in our view. Activity in the industrial sector is improving the currency.
thanks to higher steel prices and a rebound in external
demand, while private consumption is set to recover in Graph 5. Current account deficit narrowed sharply thanks
2010. The government will intensify its support to to recession but capital inflows plummeted too
households with an increase in the minimum wage and
18 current account deficit
higher social transfers. The public sector will also support bn$
FDI + Portfolio flows
investment through higher infrastructure spending linked to 15
Euro 2012. Nevertheless, the recovery will be very slow as 13
access to credit for the corporate sector and households
10
will remain limited. Credit growth to the private sector is
very likely to remain on its downward path in the coming 8
quarters. Consumer demand will also be restrained by 5
rising unemployment and falling real wages as inflation
3
remains high (13.6% in November), albeit down from a
peak at 26.4% in mid-2008. All in all, we expect GDP to 0
grow 2.5% in 2010 after contracting by about 15% in 2009. -3
Graph 4. Credit growth one of the main obstacles to strong 2002 2003 2004 2005 2006 2007 2008 2009
economic growth
80%
Source: SG Cross Asset Research, Ecowin
y/y, %
70%
Graph 6. Numerous risks weigh on fiscal deficit
60%
12
50% % of GDP
general governm ent deficit
10
40% inc. Naftogaz and banks recapitalis ation cos ts
30% 8
20%
6
10%
Jan-02 Feb-03 Mar-04 Apr-05 May-06 Jun-07 Jul-08 Aug-09 4
11 December 2009 9
Emerging Weekly
50
Forecasts
25
Mar 10 Jun 10 Sep 10 Dec 10 loans to companies
0 loans to households
USD/UAH 8.50 9.00 9.20 9.20
-25
Source: SG Cross Asset Research
2002 2003 2004 2005 2006 2007 2008 2009
0
5.0
-5
-10 0.0
2004 2005 2006 2007 2008 2009
Current account balance
-5.0
FDI
Credit growth has slowed markedly, which affected mainly 2002 2003 2004 2005 2006 2007 2008 2009
non-mining companies and households. A strong recovery
of credit growth is unlikely – despite the central bank’s
Sources: SG Cross Asset Research, Ecowin
400bp rate cuts to 7% since July 2008 - as the authorities
are tightening legislation to prevent a resumption of credit-
fuelled overheating in the construction and banking sector, Small strengthening bias for the KZT. The recovery in
as happened in 2004-07. Tight credit, the collapse in house oil prices will improve government finances and restore the
prices and the fall in real wages in 2008 led to much lower current account surplus. After a budget deficit of less than
growth of household consumption (from 11% yoy in Q4 4% of GDP in 2009, the government expects a deficit of
2007 to flat in Q3 2008). It is now gradually recovering 4.1% in 2010 based on the oil price averaging $50/bl.
thanks to the drop in inflation, which is restoring some Public finances are not an issue, as public debt is only
purchasing power. 10% of GDP. The current account balance should record a
small deficit in 2009, as domestic demand collapsed and
oil prices started to rebound, and the surplus could reach
10 11 December 2009
Emerging Markets Weekly
Forecasts
Mar 10 Jun 10 Sep 10 Dec 10
gaelle.blanchard@sgcib.com
murat.toprak@sgcib.com
11 December 2009 11
Emerging Weekly
FX Strategy
EUR/PLN 1 week view Ô 1 month view Ô
The downward path in EUR/PLN was interrupted last week as risk aversion spiked higher and
EUR/USD weakened. Rising fears about Greece’s public finances particularly affected CEE
currencies. Although this issue may weigh for some time, we do not think the CEE currencies’
recovery trend is over. We expect the PLN to eventually rebound and continue strengthening
Although risk aversion on the back of relatively strong and improving economic fundamentals. The latest economic
made a comeback, we do data have confirmed the positive momentum, although tight credit conditions will lead to
not think the PLN’s moderate GDP growth compared to previous years. Data due in the coming week should
recovery trend is over support the PLN. November CPI is expected to rise to 3.4% yoy (consensus) from 3.1% in
October and wage growth is also likely to improve. However, the labour market situation
remains difficult and unemployment will continue to rise for some time, preventing a
significant rebound in wage growth. Meanwhile, industrial output should continue to
gradually improve in the wake of the rising PMI (which jumped to 52.4 in November from
48.8).
GDP figures for Q309 showed the Czech economy has emerged from recession, recording
growth for the second quarter in a row. The result was in line with the flash estimate which
showed growth of 0.8% qoq. This means that the contraction of -4.7% yoy in Q209 eased to
Both Czech GDP and -4.1% yoy in Q309. However, this was mainly due to fiscal stimuli from abroad that supported
inflation have bottomed Czech exporters and producers. Inventories also contributed significantly to growth, after
but we do not expect a their unsustainable reduction in previous quarters. Recent foreign data, particularly from the
strong revival German industrial sector, suggest that the end of fiscal stimuli will bring another wave of
economic slowdown; this could show up in the Czech economy in Q409. For Q110, we
cannot rule out the risk of a qoq decline in GDP, as the economy will have to deal not only
with weaker foreign demand but also with the restrictive fiscal package. Nevertheless, this
package will be less constraining than the government wanted. The state budget draft was
approved by parliament, but with the removal of some mooted cost-saving measures. This
will lead to a wider gap, of probably 5.7%/GDP, than the 5.3% the government had targeted.
While the GDP figures were in line with the central bank’s forecast, November inflation
surprised on the upside. However, the first increase in consumer prices of 0.2% mom since
February was due solely to higher fuel, food and non-alcoholic beverage prices. These are
components the central bank cannot influence through its monetary policy. According to our
calculations, yoy adjusted inflation stayed marginally in the red in November; in a mom
comparison no increase in adjusted inflation was recorded. It is true that headline inflation is
40bp above the CNB’s current inflation prognosis. However, this leaves room for further
decreases in interest rates; we think a 25bp cut would be consistent with the data and the
CNB’s inflation forecast.
Thus, the economic indicators released this week did not solve the puzzle of the outcome of
Key event of next week is next week’s monetary policy meeting. The bank voted by 4:3 to keep rates unchanged at the
the CNB meeting: we last meeting. Board member Zamrazilová, who voted for no change last time, admitted that
expect a tight call. CZK the central bank may have room to lower interest rates if the inflation outlook remains benign
will react accordingly and a decrease would help the economy recover from a recession. But, as she stressed, she
was undecided.
Because of uncertainty surrounding next week’s CNB meeting, we would expect some
EUR/CZK reaction to the decision; the market is pricing in a 50% chance of a 25bp cut.
However, we would not expect any long-lasting impact as the interest rate differential does
not play a significant role in the exchange rate determination. EUR/CZK will be driven mainly
by global sentiment towards emerging currencies over the upcoming weeks.
EUR/RON’s recent downward trend was interrupted this week by the spike in risk aversion
Persistent political and domestic political developments. The victory of outgoing Romanian president Basescu
uncertainties and risk in the second round of the presidential election on 6 December was somewhat of a surprise.
aversion weigh on the The opinion polls had suggested the Social-Democrat leader Geoana was leading, but only
RON by a small margin. The very close outcome (50.37% of votes for Basescu and 49.63% for
12 11 December 2009
Emerging Markets Weekly
Geoana) led the opposition to contest the result. The constitutional court will say in a few
days whether it will overturn the result. In any case, political uncertainty is not over. If
Basescu’s victory is confirmed, Romania will be back in the pre-election situation, with the
majority in parliament against the president. This will complicate the nomination of prime
minister and the formation of a government. The longer the deadlock, the longer the IMF
payment will be delayed. Broad support for the economic programme is needed but the
EUR/RON downtrend will government will most likely be a minority one and it will not be easy to pass the necessary
resume once/if the IMF measures.
programme is back on
In this context, we expect the central bank to keep its key rate unchanged again on 5
track
January, as the fate of the IMF programme will probably still be uncertain at that time.
Although the weakness of the economy, tight credit conditions and the slowdown in inflation
provide room for further rate cuts, tensions on the money market and on the RON exchange
rate will keep the NBR cautious. FX-wise, RON’s upward move has been interrupted but
downside potential is limited to 4.29-4.30 by the central bank’s interventions. The EUR/RON
downtrend will resume once/if the IMF programme is back on track.
The last key event of the year will be the central bank meeting on 17 December. This meeting
is important as it will seal the end of the rate cut cycle, in our view. We still see the possibility
of a final 25bp cut to 6.25% but the decision will be a close call. The minutes of the last MPC
CBRT’s decision will be a meeting made a final rate cut less certain as the wording didn’t directly mention further cuts.
close call Moreover, market perception has also changed since the release of the October industrial
production number, which showed an unexpected rise of 6.5%. It was the first positive
reading since July 2008. GDP contraction also slowed to -3.3% yoy in Q3 after -7.9%,
confirming that the Turkish economy has definitely left the recession phase.
However, leading indicators suggest that the recovery is slow and vulnerable. Manufacturing
Leading indicators PMI fell for the fourth month in a row in November, while the central bank’s surveys signalled
suggest that the recovery that both business and household confidence are deteriorating after the improvement from
is slow and vulnerable March-July. Moreover, the capacity utilisation rate in the manufacturing sector fell to 70.7%
in November after 71.8%. This raised some doubts about the sustainability of the recent
rebound seen in manufacturing production.
All in all, our scenario favours a last cut of 25bp. However, we would not be surprised if the
MPC preferred to keep rates unchanged; this would in fact prove TRY-positive. We believe
A no change decision the end of the carry compression will be a key parameter for the TRY in the coming months.
would be TRY-positive For now, we stay long TRY/ZAR (directional view) and recommend selling USD/TRY above
1.50 (tactical view).
USD-BRL first tested 1.7000 on 14 October. The Brazilian authorities then went on the
offensive the following week, mounting an aggressive verbal intervention campaign and re-
The 1.70 to 1.78 range is imposing the IOF transaction tax. Since then, USD-BRL has traded inside a narrow range
now eight weeks old. We bounded by 1.70 and 1.78. It has tested 1.70 on various occasions and met with substantial
expect it to continue to central bank intervention, according to daily reserves data. This week, the 1.78 level has
hold and retain our DNT been tested on a couple of occasions and has held, apparently due to exporter sell orders
above 1.77. We think 1.78 will continue to hold and retain our enthusiasm for the 6-month
double-no-touch (DNT) digital option we added to our model portfolio three weeks ago. That
position has slipped a touch in the past few days, but should gain it back if spot USD/BRL
moves back below 1.75 over the next few days, as we expect.
As expected, the central bank of Brazil (Bacen) kept its base rate unchanged at 8.75% on 9
Bacen has been December. The statement was identical to that of the 21 October. The decision was
intervening at a pace of unanimous and the committee gave no bias for the next rate move. The minutes will be
about $400m per day released on 17 December and are likely to repeat the dovish tone of previous releases and
over the past week. recent public comments by Bacen officials. The latter might become a bit more hawkish if
Reserves data suggests USD/BRL were to move back above 1.90 because BRL appreciation has been an important
Bacen intervenes contributor to bringing inflation below the 4.50% target. For now however, Bacen welcomes
heaviest on days when a low volatility environment in FX and probably hopes to be able to keep the base rate
BRL rallies unchanged for three to six more months and thereby solidify economic recovery. Bacen has
been able to step away from the FX market in the past few days according to daily FX
reserves data. After growing by an average of $400m per day in the first week of December,
11 December 2009 13
Emerging Weekly
reserves have been essentially unchanged, which suggests that Bacen retired to the
sidelines as USD/BRL moved upwards from 1.70.
We remain constructive Our long MXN/CLP position has experienced a wild ride this week, principally due to volatility
on MXN and committed in USD/MXN. That volatility has also had a negative impact on our USD/MXN vs USD/TRY vol
to our two model portfolio swap pairs trade. Despite these setbacks, we remain generally constructive on MXN and
trades, despite acute expect USD/MXN to ease back below 12.80 in the coming week. As we noted last week, long
volatility this week MXN positions on the IMM had gotten too large, making them ripe for a run on stops, which
is what occurred in the past few days. Now that the run is complete, volatility in USD/MXN is
likely to settle down, even if volatility in equities and other risk assets heats up.
The main event of the coming week in Mexico should be the confirmation of nominee
Augustin Carstens as Banxico governor. Mexico’s congress is scheduled to close for the
Some angst in market year after the 15th, so hearings are likely to be on that date, even though as we write they
over lesser status of haven’t been scheduled yet. After his nomination, Carstens said on radio that Banxico would
Cordero, the replacement have “a relatively long period” to revise its monetary policy stance. Although that
for finance minister pronouncement was a bit more dovish than the Ortiz-led Banxico typically uttered, Carstens
Carstens (who’s is a former research director at Banxico, in addition to having been well respected for his
becoming Banxico conservative monetary and fiscal principles when he was finance minister. The bigger issue
governor). We believe this for markets has been his announced replacement in that role: Ernesto Cordero. He does not
will pass quickly have the stature that Carstens had when he took up the FM role, which has led to some
market angst about his ability to pass further energy and tax reforms and hammer through
future budgets. That concern is probably overdone and we think will recede when growth
and oil prices pick up early next year.
First rounds of The first round of the presidential election is this Sunday (13 December). Polls suggest that
presidential and centre-right candidate Sebastian Piñera will capture the most votes but won’t have the 50%+
legislative elections on majority necessary to avoid a second round. Former president Frei of the ruling centre-left
Sunday 13 December. Concertactión coalition is in a tight battle with centre-left independent Marco Enriquez-
Ruling party of past 20 Ominami for second place and the right to advance to the second round of voting on 17
years could lose power - January. A Frei loss would be politically upsetting for a country that has been ruled by
would be a big news Concertactión for 20 years, but it is unlikely to unsettle the markets. An outcome where Frei
event, but not a big fails to advance and Piñera is the obvious winner for president in the second round, but
market event Concertactión retains control of the legislature, would be particularly interesting. Such an
outcome would arguably lead to Mexico-like gridlock and potentially have a negative impact
on the ability to pass economic reforms. However, there is no obvious need for reforms at the
moment and therefore no likely market impact from the election.
14 11 December 2009
Emerging Markets Weekly
Until recently, the IDR had been performing strongly in 2009. However, it has recently
underperformed and is set to weaken modestly in the near-term and be a middle-of-the-pack
performer in 2010. Comments from the central bank following the 3 December policy meeting
suggested some concern over unchecked currency strength. This has prompted a review of
IDR expectations by investors who thought that a stronger IDR would not only be tolerated
but encouraged. Other risks for the currency are any renewed deterioration in trade and
current account positions, or a policy misstep by Bank Indonesia.
Reassessment of global
risk appetite will put IDR Heading into year-end, a clear reassessment of risk appetite is at play, with commodity prices
under some pressure lower and the USD firmer against most currencies. If USD gains reflect a more constructive
global demand outlook, the IDR as a pro-cyclical currency should perform well. Still, the
central bank’s change in tone suggesting a heightened focus on export competitiveness will
be a counter-balancing influence, leaving little chance of a repetition of the 2009
outperformance.
We target USD/IDR spot at 9,700 (last 9,435), but expect this level to provide a selling
opportunity. The current premium in USD/IDR NDFs is rich for entering IDR shorts (1M +69bp
and 6M +244bp), so we will use the NDF premium on a spot rally towards 9,700 to establish
long IDR trades against a basket of G7 currencies.
We expect some consolidation in USD/INR over the next couple of weeks. But we ultimately
target resumption of INR strength, both on the impact of inflows and in tune with a general
move towards Asian currency strength. INR gains will be underpinned by maintenance of
strong portfolio and FDI inflows, in our view. The Reserve Bank of India has been one of the
most interventionist of central banks in 2009. However, we believe resistance to moderate
currency gains is waning at the same time as policymakers contemplate rate hikes, with the
first 25bp looking set to be delivered in Q1.
Portfolio and FDI flows
provide strong support to The INR has posted modest performance ytd, up just 4.3% against the USD. But it has
the INR outperformed other Asian currencies during the past couple of months, gaining 5.2% against
the dollar as markets reacted to a stronger-than-forecast pick-up in activity data. Industrial
production has rebounded on a recovery in exports. However, the trade account remains in
deficit and will be a drag on what would otherwise be outperformance in 2010.
The RBI next meets to decide on rates on 29 January. It will be a close call on whether or not
to deliver a 25bp hike. At the last meeting the SLR was raised 100bp and inflation forecasts
were revised higher. To position for rate tightening, which we expect will be aggressive once
under way, we recommend 1yr 2yr OIS flatteners (entry 75bp, target 30bp, stop loss at 95bp).
gaelle.blanchard@sgcib.com
jan_vejmelek@kb.cz
greg.anderson@sgcib.com
patrick.bennett@sgcib.com
11 December 2009 15
Emerging Weekly
Technical analysis
BRL/ILS: ST bearish signal
BRL/ILS should break LT resistance line
below the late October low of
2.13 and dip to the 1.99/2.03 2.19
support area.
Following the down-move 2.13
started at 2.19 in mid-
November, which revealed an
LT declining resistance line, 1.99/2.03
BRL/ILS broke below the lower
end of its MT rising channel.
This bearish signal is confirmed
by the bearish configuration of
the 14-week RSI.
So we expect BRL/ILS to break WEEKLY CHART
below the late October low of MT rising channel
2.13, which is in sight, and
extend the decline from 2.19 to
the 1.99/2.03 support area (*).
1.59
The cross should then attempt
to reverse upwards.
(*) Pullback level and lows of June
and August 2009.
14-week RSI
3rd support 2nd support 1st support Last 1st resistance 2nd resistance 3rd resistance
1.99/2.03 2.09 2.13 2.15 2.19 2.25 2.29
16 11 December 2009
Emerging Markets Weekly
FX Quantsight
PCA on EM vol (ATM, 3M, USD base) Risk premia for EM volatilities
C urrency Im plied R ealised R isk
V a lu e V a lu e
pair E xpiry vol (% ) vol (% ) prem ium
V o la tility z -s c o r e m a r k e t (% ) m o d e l (% )
U S D /K R W 2Y 15.0 24.2 0.6
MXN 1 .3 5 1 5 .3 0 1 2 .4 3 E U R /C ZK 2Y 7.3 11.1 0.7
IN R 1 .0 6 1 2 .1 5 1 0 .6 6 E U R /P LN 1Y 12.9 17.1 0.8
PLN 0 .9 3 1 9 .1 2 1 8 .0 1 E U R /C ZK 1Y 8.5 11.2 0.8
BRL 0 .6 0 1 7 .8 0 1 6 .9 4 E U R /P LN 2Y 12.0 15.4 0.8
CZK 0 .4 0 1 5 .3 0 1 4 .9 9 E U R /H U F 1Y 12.5 15.7 0.8
HUF 0 .1 9 1 8 .5 2 1 8 .3 4 U S D /K R W 6m 14.3 11.0 1.3
ID R 0 .1 7 1 3 .9 6 1 3 .5 9 U S D /K R W 3m 13.5 10.1 1.3
ZAR -0 .4 0 1 9 .8 8 2 0 .3 7 U S D /B R L 3m 17.9 13.4 1.3
KRW -0 .6 2 1 3 .5 0 1 4 .9 5 U S D /M XN 6m 16.0 11.5 1.4
SGD -1 .6 7 6 .6 2 7 .3 3 U S D /K R W 1m 12.0 8.3 1.4
TRY -1 .8 7 1 2 .9 9 1 6 .0 4 U S D /B R L 1m 17.4 11.9 1.5
Source: SG Cross Asset Research
11 December 2009 17
Emerging Weekly
debt*
– receive South Africa vs pay Brazil short rates 23
3. Steepening has not necessarily faded yet – Enter a PLN 18
2s5s flattener around +80bp during H1 2010 13
8
Limited impact on EM bond funds from recent worries Jan 04 Jul 05 Dec 06 May 08 Oct 09
BUT differentiation remains key Czech Poland Hungary Turkey
Recent concerns on Dubai and Greece do not seem to
have put investors off emerging market debt, as evident in Source: SG Cross Asset Research, Bloomberg, Ministry of Finance. * includes external debt for
the Czech Republic
the latest fund flow data from EPFR Global, which still
shows inflows into EM bond funds (see Graph 1).
Estimated carry is +50bp a year (assuming equal
weightings on both legs). Due to the higher beta status of
Graph 1. EM bond fund flows are still up Russian rates, we recommend underweighting the RUB
leg, which should improve the carry further.
USDbn
19 Graph 3. PLN 5y IRS and RUB 5y CCS
15
% %
11 35 7
30 6.5
7
25 6
3
20 5.5
-1
15 5
Jan 04 Mar 05 May 06 Jul 07 Sep 08 Nov 09
10 4.5
All EM Funds Cummulative Flow US$ in bn
All EM Bond Funds 5y average 5 4
Dec 07 May 08 Sep 08 Feb 09 Jun 09 Nov 09
Source: SG Cross Asset Research, EPFR Global
RUB 5y CCS (LHS) PLN 5y IRS (RHS)
In CEEMEA, non-resident holdings of government debt for Source: SG Cross Asset Research, Bloomberg
Poland, Czech Republic, Turkey and South Africa are also
showing an upward trend. However, non-resident holdings
of Hungarian local debt are clearly lagging (see Graph 2). Deferring monetary cycles favours CEEMEA rates over
This reiterates the importance of differentiation as Asia/LatAm peers
discussed in our 2010 Outlook. To recap, we favour local
CEEMEA is likely to lag LatAm and Asia in reversing the
markets (1) with lower external debt and/or loan losses and
easing cycles. In fact, we think cuts are still possible in the
(2) lower FX intervention risk, especially where local rates
Czech Republic, Hungary, Russia, Romania, South Africa
are highly correlated with FX.
and Turkey (see 2010 Outlook). In LatAm, we expect Brazil
Strategy: Receive 5y Polish IRS vs pay Russia cross to lead the hiking cycle as early as end-Q2 2010.
currency swaps (CCS) to express our preference for
Strategy: Receive ZAR 1y1y forward vs pay Brazil DI
Poland over Russia based on the two considerations
futures in mid 2011-2012 maturities (Graph 4). We already
above. We choose 5y because it offers some duration and
have a ZAR 1y1y receiver position in our portfolio from July
is less affected by monetary policy bias. We look to receive
2009. We maintain this position to play this theme and use
PLN 5y IRS from 5.60% (see Graph 3) and enter the Russia
any spike up towards 8.20% as an opportunity to increase
leg towards the first half of March as we expect inflation to
rebound and RUB to depreciate into H1 2010 (see FX
18 11 December 2009
Emerging Markets Weekly
this position. Target: 7.75%. Carry is positive at +15bp over Graph 5. PLN 2s5s IRS curve
three months.
bp
We choose Brazil rates as we expect it to lead the hiking
cycle in LatAm. Hikes are already priced in. Hence, we look 66
for a more hawkish stance from the Bacen or more robust
inflation data to establish the payer position. 42
18
8 12
7 11
Dec 07 May 08 Sep 08 Feb 09 Jun 09 Nov 09 esther.law@sgcib.com
11 December 2009 19
Emerging Markets Weekly
Issuance Calendar
Date Issuer Bond Planned Amount (Bn local ccy)* Bid-Cover
01-Dec-09 Hungary 3M T-Bill D100310 40.00 3.24
South Africa R203 1.30 4.38
R208 0.80 5.21
02-Dec-09 Poland OK0712 1.44 3.80
PS0415 3.63 1.55
Czech 15Y 2009-2024, 5.70% Bond 3.03 2.60
03-Dec-09 Czech T-Bill 579 5.00 Cancelled
Hungary 2013/E 7.50% 25.00 1.72
2015/A 8.00% 20.00 2.40
2019/A 6.50% 10.00 2.89
04-Dec-09 South Africa T-Bill 364 day 0.30 1.68
T-Bill 273 day 0.70 2.01
T-Bill 182 day 0.90 2.08
T-Bill 91 day 3.65 1.35
R197 Inflation-linked bond 0.50 1.00
R202 Inflation-linked bond 0.10 1.16
07-Dec-09 Israel ILGOV 4% 03/2012 0.25 3.28
ILGOV 4.5% 01/2015 0.25 2.08
ILGOV 5% 01/2020 0.50 3.27
ILFRN 5/2020 0.25 10.15
08-Dec-09 Turkey 20m zero coupon 1.02 3.04
Hungary T-Bill D100317 40.00 3.69
South Africa R204 1.00 4.61
R207 1.10 5.15
09-Dec-09 Poland IDS1018 (BGK) 1.91 2.10
10-Dec-09 Hungary T-Bill D101215 40.00 1.87
11-Dec-09 South Africa T-Bill 364 day 0.30
T-Bill 273 day 0.70
T-Bill 182 day 0.90
T-Bill 91 day 3.65
R197 Inflation-linked bond Total I/L offer = 0.6
R210 Inflation-linked bond
R202 Inflation-linked bond
14-Dec-09 Israel ILGOV 4.5% 01/2015 0.25
ILGOV 5% 01/2020 0.25
ILCPI 1.5% 06/2014 0.25
ILCPI 3% 10/2019 0.25
ILTBIL0 08/2010 0.25
15-Dec-09 South Africa R209 0.90
R157 1.20
16-Dec-09 Poland T-bond switch auction
17-Dec-09 Hungary 2013/E 7.50% 25.00
2015/A 8.00% 15.00
2019/A 6.50% 10.00
18-Dec-09 South Africa Treasury Bills
21-Dec-09 Israel ILGOV 5% 01/2020 0.25
ILCPI 4% 5/2036 0.25
ILFRN 5/2020 0.25
ILTBIL0 08/2010 0.25
22-Dec-09
23-Dec-09
24-Dec-09 South Africa Treasury Bills
25-Dec-09
28-Dec-09
29-Dec-09
30-Dec-09
31-Dec-09 South Africa Treasury Bills
Source: SG Cross Asset Research, Ministry of Finance, Reuters, Bloomberg
*Past auctions show amount sold, Czech Republic,Israel Bid-Cover ratio is calculated from the competitive auction
20 11 December 2009
Emerging Markets Weekly
Rates Quantsight
Level indicator 93.7% (-0.8%) 11.1% (+3.8%) 45.1% (-3.1%) 58.8% (-1.4%) 38.0% (+10.2%)
Slope indicator 53.7% (+1.7%) 100.0% (+9.7%) 82.8% (+6.4%) 96.5% (+4.9%) 58.4% (+1.6%)
Convexity indicator 32.2% (+1.6%) 20.6% (+2.5%) 34.1% (+7.4%) 16.6% (+4.9%) 43.0% (-2.4%)
Level explanatory power 98.1% 99.6% 94.3% 83.0% 82.3%
Slope explanatory power 1.7% 0.3% 4.8% 16.4% 14.9%
Convexity explanatory power 0.2% 0.0% 0.6% 0.4% 1.8%
Top driver 5Y 2Y 7Y 7Y 7Y
Best flattener 7Y-10Y 5Y-7Y 5Y-10Y 2Y-5Y 2Y-7Y
Best slope trades
Ind. mid / spread to model 1.0bp (+1.5bp) 4.0bp (+2.4bp) 47.0bp (+2.7bp) 83.0bp (+0.4bp) 167.3bp (+12.6bp)
z-score 0.90 0.99 2.45 0.48 2.16
Total carry and roll-down (3M) -1.1bp -1.7bp -0.2bp 18.4bp -6.4bp
Best steepeners 5Y-7Y 2Y-5Y 5Y-7Y 5Y-7Y 7Y-10Y
Ind. mid / spread to model 3.0bp (-1.0bp) 36.9bp (-1.5bp) 19.0bp (+0.6bp) 17.0bp (-0.8bp) 26.3bp (-11.8bp)
z-score -0.84 -0.90 0.40 -0.47 -2.14
Total carry and roll-down (3M) 3.9bp 10.3bp 0.7bp -0.8bp 4.6bp
Best barbell payer (*) 5Y-7Y-10Y 3Y-5Y-7Y 3Y-5Y-7Y 5Y-7Y-10Y 3Y-5Y-7Y
Ind. mid / spread to model 2.0bp (-2.5bp) 13.5bp (-2.9bp) 12.0bp (-5.9bp) 14.5bp (-1.5bp) 29.3bp (-0.8bp)
z-score -0.95 -0.68 -2.06 -0.46 -0.10
Total carry and roll-down (3M) 2.7bp 2.8bp 4.2bp -1.5bp 3.8bp
Correlation with levels 77% 1% 11% 48% -41%
Best barbells
11 December 2009 21
Emerging Markets Weekly
22 11 December 2009
Emerging Markets Weekly
Source: CSO, KB
jiri_skop@kb.cz
0% -7%
-2%
-13%
-4%
-6% -19%
Jan.00 Jan.02 Jan.04 Jan.06 Jan.08 Jan.10
Source: CSO, KB
jiri_skop@kb.cz
11 December 2009 23
Emerging Markets Weekly
1 30
Risk seeking
SG Sentiment Indicator
25
0.8
20
0.6 15
10
0.4
5
0.2 0
Risk averse (5)
RON
HUF
RUB
PLN
MXN
KRW
ILS
CNY
CZK
TRY
BRL
ZAR
0
Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09
Source: SG Cross Asset Research, Bloomberg. *see FX QuantSight Source: SG Cross Asset Research, Bloomberg
EM rates performance (2Y IRS bp change YTD) EM Equities performance (% change YTD)
RON 120
CNY
100
ILS
KRW 80
PLN 60
CZK 40
ZAR
20
HUF
MXN 0
RON
HUF
RUB
USD
PLN
MXN
KRW
CZK
ILS
CNY
TRY
BRL
UAH
KZT
ZAR
BRL^
TRY*
RUB*
EM equities Chg (%) since 01 Jan 09
-2000 -1500 -1000 -500 0 500 MSCI EM
Source: SG Cross Asset Research, Bloomberg, ^Jan 11 DI * XCCY Source: SG Cross Asset Research, Bloomberg
0 25 0 1600
-10 1400
-20 20
-20 1200
-40 15 -30 1000
-40 800
-60 10 -50 600
-60 400
-80 5
-70 200
-100 0 -80 0
RON
HUF
RUB
RON
EUR
PLN
MXN
HUF
KRW
TRY
CZK
ILS
RUB
CNY
BRL
PLN
MXN
UAH
KZT
KRW
CNY
ILS
TRY
CZK
BRL
ZAR
ZAR
Source: SG Cross Asset Research, Bloomberg Source: SG Cross Asset Research, Bloomberg
24 11 December 2009
Emerging Markets Weekly
EM FX forecasts
Mar 10 Jun 10 Sep 10 Dec 10
EMU Monitor
General
General Maximum Maximum
HICP Long-term Government ERM II Lower Central Upper
Government upward downward
Inflation* GB yield* Balance, entry Rate Rate Rate
Debt deviation** deviation**
last Q4 avg
period 10.2009 10.2009 06.2009 06.2009
Reference Value 1.8 5.8 -3.0 60
11 December 2009 25
Emerging Markets Weekly
Macro forecasts
GDP Inflation (year average)
2007 2008 2009 2010 2007 2008 2009 2010
Source: SG Cross Asset Research, KB economic & strategy research, SG Poland, BRD Economic Research
26 11 December 2009
Emerging Markets Weekly
Economic Research
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