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In this write-up, the central banks of EM rate expectations monitor reveal some opportunities. While EMFX implied volatility has moved higher from the multiyear lows this week and DM rates sold off.
In Korea, the market is priced for 25bp of rate hikes over the coming year while the Bank of Korea (BoK) is expected to keep its policy rate unchanged at 1.25% by unanimous decision at its policy meeting on 13 July. The BoK is likely to revise up its GDP forecasts as it already suggested at the meeting in May, but we don’t expect it to give any formal guidance on the direction of monetary policy.
The recent spike in 2yr swap rates offers a good opportunity to tactically receive the front-end.
In India, the market expects the RBI to ease again (20bp priced in through to October). But we do not envision more cuts beyond that and unless the RBI cuts and sounds very dovish, paying rates offer better risk-reward in our opinion.
In Russia, payer positions at the front-end offer better risk-reward. The market is priced for 70bp of cuts to year-end, the CBR doesn’t appear to be in a rush to cut aggressively.
The bond connects could make the correlation of Chinese rates with global yields more positive and stable over time if foreign investors become more active in China’s bond market.
The correlation between weekly changes in Chinese and global yields (we use US, Germany, and Korea as examples) is currently quite high on a historical basis. Correlations do not mean causation, and the chart to the left shows that over the past five years there have been episodes of both positive and negative correlation.
