In EM, we remain MW FX overall and neutral in LATAM and EMEA, with small OW in EM Asia. We hold relative value long TRYZAR, and stay UW RUB vs OW TRY

The bearish stance on BRL relative to the rest of the EM FX complex is upheld and our 3.40 forecast might prove to be overly optimistic if politics and delays to reform initiatives conspire to alter investor attitudes. With that said, there will be limits to BRL depreciation given a supportive EM backdrop.

Brazil’s Prosecutor-General Rodrigo Janot charged President Michel Temer with corruption. The charges stem from the secret recording between Temer and the former CEO of JBS where Temer was accused of endorsing hush money.

EM currencies posted modest gains over the past twenty-four hours, building on the week-long rally. Weaker-than-expected US durable goods orders were helpful in this regard.

This fits with ongoing downward surprises in US data (the Bloomberg economic surprise index is at the lowest since November and Citibank index is at the lowest in 5 years). This is suppressing Fed and US yield expectations.

EM currencies were pretty resilient to the down move in oil in the last month. Flows have been encouraging, real yields are attractive, and external balances are better than at any point over the last 5 years. If oil prices stabilize or rise, and Fed expectations remain subdued, it will continue to provide fertile ground for the carry trade.

Thus, we like INR, TRY, MXN and ZAR but not BRL or RUB.

The Bellwether for FX sentiment at the moment may be the Ruble. It has weakened in June as oil prices fell, with the clear approval of the CBR, but the last time Brent traded down to USD 44/bbl, USDRUB was up at 66, and this move hasn’t even taken it to 61. We’re back below 59 this morning.

CNY: beware another funding squeeze, after engineering (another) epic squeeze in late May/early June, overnight points have dipped into negative territory, 1m points are near five-year lows, the 430pm CNY closing price is back to a discount to the fix, and USDCNH is rising again.

Usually, the IVs (implied volatilities) in CNH is meager, but the economic difficulties in China but also the surprising institutional changes (e.g. to the fixing process) suggest that higher CNY volatility is likely to be the norm in the future.

a decision between these two tools should not be based exclusively on current price levels as a peculiarity of CNY-NDFs has to be taken into consideration: Usually, CNYNDFs are settled on the basis of the PBoC fixing, even though this approach is actually based on a misunderstanding. Even if everyone calls the PBoC’s quotation “fixing“ that is not what it is. A fixing would be a determination of the market rate (and would, therefore, be close to the spot rate).

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