FxWirePro: A glimpse through EMFX and derivatives trades perspectives

EMEA EM FX weakness seems to be modest. We project modest EMEA EM FX weakness, as well as market volatility and risk premia, rise in response to changing global monetary policy narrative. Importantly for investors, we think that markets will repeatedly return to the theme of global central bank policy normalization in the months ahead, serving as a constraint on EM risk appetite.

In EMEA EM FX: We are OW TRY and CZK vs. UW RUB and HUF in the GBI-EM Model Portfolio. In EM FX our current trade recommendations continue to have a bias toward selling the dollar against high yielders (MXN, TRY, ZAR) with selective short dollar exposure in low yielders (short USDTHB) as per JPM.

RUB has worried us and we are long USDRUB in both spot and options. We have owned a number of USDCNH options starting from last July - seagulls, long-dated cal spreads - that is a little underwater. But we are happy to maintain the exposure from Stay UW RUB, although valuations are becoming closer to fair.

We are UW RUB and hold long USDRUB 6m call options (entry ref: 57.00, strike 59.00). We turned bearish RUB positions on 8 June, on the view that faltering oil prices, brewing geopolitical tension and a relatively dovish central bank would limit the potential for RUB appreciation, making the currency overvalued given its resilience so far this year. However, the sell-offs in oil in June and the corresponding RUB weakness has closed most of the valuation gap a portfolio perspective.

In EM rates, out bias is for paying (CZK) and steeper curves (China, Turkey, Mexico). We have been paying in CZK 10yr IRS since May 18, which after the recent hawkish tone from CNB should play out well. Front-end rates in China, Mexico, and Turkey should remain anchored while longer-end rates will be more affected by an upward drift in US/European yields.