Research Team at Societe Generale, suggests that their top down message remains unchanged; it is too early to position for a sustained reversal in the EM depreciation trend that started in 2011.
Key Quotes
“Mini tactical rallies can unfold when positioning is stretched, like in late January or more notably in early October, but these will be fleeting until underlying fundamentals significantly improve. Our forecast updates continue to reflect a challenging year for EM. Asia is expected to underperform, followed by the EMEA dollar bloc (ex-RUB) and LATAM, while the EUR-bloc currencies should show a modest appreciation bias.
FX
In Asia, CNY mid fixed close to pre-Chinese New Year levels on stronger dollar index and fundamentals continue to point to further depreciation. In LatAm, we remain sidelined in BRL following this week commendable resilience, but leaner positioning and sensitivity to political news are likely to spur further bouts of outperformance.
In EMEA, the PLNHUF cross may have room to retrace higher on the back of the MNB’s relative proclivity to ease, compound by a further unwinding of political risk premium in Poland.
Fixed Income
In EMEA, stabilising sentiment following the budget address in South Africa appeasing bond supply risks may contribute to a compression of asset swaps from close to multi-year highs. In LatAm, TIIE rates are likely to maintain a steepening bias, with longer tenors sensitive to fluctuations in economic conditions and market perceptions of the future need for rate hikes.
The KRW and TWD rates curves are likely to remain flat with strong domestic demand hunting for yields. In sovereign credit, our main overweight names are Brazil, Colombia, Croatia, South Africa and Ukraine; our main underweight is The Philippines, followed by Poland, Romania and Turkey.”
(Market News Provided by FXstreet)
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