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FxWirePro: EMFX space in 2018 likely to benefit from US expansionary phase

Record US expansion/strong global growth supportive for selective carry if the US expansion can survive until spring 2019 it would be the longest in post-war history. And whether the Fed hikes three times next year or four, this cycle would still be the slowest in history. This combination remains supportive for FX that are dependent on global growth (say SGD within Asia), or selective carry FX where vulnerability to external shocks is least pronounced.

In BRL, faster growth should strengthen portfolio inflows and reinforce a much improved current account. Elections will be an issue starting in 2Q18, but our base case is for a market-friendly outcome, one that will allow the passage of pension reform. The Fed was first out of the blocks with a strong policy response to the global financial crisis, prompting the Brazilian finance minister to bemoan ‘currency wars’.

EM currencies rely more on carry for returns. But valuations aren’t yet demanding and the growth backdrop offsets gradual Fed rate hikes. The PLN and CZK are our picks among low-vol EM currencies, and we think the MXN, TRY and ZAR look cheap.

Fundamentals are currently uber-supportive for EM currencies. But as this opinion has become the consensus, it raises red flags. A simple, and perhaps naive, parallel to previous cycles suggests that 2018 may resemble 2006 (implying that there may be more room for risk assets to run). But we worry that the parallels for 2018 are closer to 2007. As asset markets enter their late-cycle phase, the delta on “surprises” is more likely to hurt rather than benefit EM FX.

From a dispersion perspective, the TRY, ZAR, MXN, and BRL could show the highest level of dissimilarly compared with the rest of the EM currency universe.

While we fund in NOK to 1) limit drawdown in the event Fed policy gets upgraded more aggressively, and 2) benefit from continued drift in NOK as the Norges Bank remains at the back of the line to tighten monetary policy. The upgrade to the Norges Bank’s rate path this week does not necessarily change the relative sequencing of policy moves in NOK’s favor.

Bought BRL/NOK at 2.5360on November 21. Review at 2.46.Marked at -0.48%.

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January 19 15:30 UTC Released

USECRI Weekly Annualized

Actual

4.5 %

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Previous

3.3 %

January 19 15:30 UTC Released

USECRI Weekly Index

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150.3 %

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Previous

147.6 %

January 21 21:00 UTC 620620m

KRPPI Growth YY

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3.1 %

January 21 21:00 UTC 620620m

KRPPI Growth

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-0.1 %

January 21 23:00 UTC 740740m

JPReuters Tankan DI

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27 k

January 22 07:00 UTC 12201220m

NOIndus Confidence

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2 0

January 22 08:00 UTC 12801280m

TWJobless Rate

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3.69 0

January 22 08:00 UTC 12801280m

TWExport Orders YY

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11.6 0

January 22 09:00 UTC 13401340m

GRCbank C/A YY

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Previous

-0.624 0

January 22 13:30 UTC 16101610m

USNational Activity Index

Actual

Forecast

Previous

0.15 %

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