FxWirePro: Snippets of BRICS FX and Trading Radar – Episode 2

The recent global growth developments and cheaper valuations have taken some heat out of the EM sell-off, but trade tension and cyclical risks keep us neutral. Collateral damage to EM from a US-China trade war could be significant, particularly on EM Asia. Trade tension concerns have not yet moved EM fixed income assets much compared to EM vulnerability-related weakness.

INR: There was a seemingly a sigh of relief as June’s headline inflation surprised on the downside at just 5% YoY. Some feared the worst of a possible spike towards 6% due to the low base last year. In the end, it was relatively contained due to the continued moderation in food prices. Food prices form the bulk of the CPI basket with a 54% weight and they eased to 3.2% YoY in June from 3.4% previously.

However, RBI is likely to remain concerned about inflationary risks as core inflation is still running hot. It rose to 6.5% yoy in June and averaged 5.7% in H1. Although RBI targets headline CPI (2-6% range) rather than core CPI, the steady rise in core CPI due to underlying strong domestic demand is a worry.

Trade tips: We still look for another hike in August and possibly a further 25bp before end-2018. What does it mean for USDINR? Rising expectations of two more hikes this year could provide some support for the battered INR which has depreciated by nearly 7% vs USD year-to-date and the weakest among Asian currencies. However, oil prices remain the key driving factor near term and if they consolidate or correct further, this should also see USDINR ease back to the lower end of the 68-69 range.

Hence, trading grounds one can buy 1m ATM strangles to capitalize on the range bounded trend and fetch certain yields, one could maintain 1% OTM strikes having narrowed expiration on these contracts.

CNY: We’ve received again a stable China GDP prints, however, the growth concerns are lingering. China’s economy grew 6.7% YoY in the Q2, which is in line with market consensus. The economy advanced by 1.8% on QoQ basis after seasonal adjustment, versus a 1.4% growth in the prior quarter. While Q2 GDP appears to be satisfactory, the activity data illustrated a sluggish momentum – While retail sales and fixed asset investment hovered around the historical low level, growing by 9.0% YoY and 6.0% YoY respectively in June. Furthermore, industrial production slowed to 6.0% YoY in June, down from 6.8% previously. Looking ahead, the trade tensions have significantly increased the downside risks to the economy. Moreover, the domestic issues, such as debt problems and property bubbles, remain the key challenges for China’s economy. That said, a weaker CNY can be expected.

Trade tips: At spot reference: 6.6967, on hedging grounds, stay long in 2m USDCNY forward contracts with a view to arresting upside risks. These forward derivatives contracts help foreign traders manage their FX risks in the currency market by locking in the future exchange rate and predetermined date on which they would make a foreign exchange transaction.

ZAR: On a risk-reward scorecard, ZAR screens poorly, with the least amount of reward for the risks taken. Traditionally, this net score has correlated well with subsequent FX return, pointing to further ZAR weakness. South African currency is still modestly overvalued. South Africa is relatively highly exposed to a further escalation of US protectionist measures. Its main commodity export, platinum, is very much linked to the auto sector, and in general, its commodity exports rely on China’s and global growth. At the same time, even despite recent FX weakness, the currency continues to screen somewhat overvalued in our FV models. In fact, it’s the only currency within EMEA EM to do so.

Trade tips: Buy 06-Dec-18 USDZAR call (14.50), spot reference: 12.72.

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards 59 levels (which is bullish) while articulating (at 13:26 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex