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U.S. Stocks vs. Bonds: Are Diverging Valuations Signaling a Shift? 
EM currencies as a group were negatively affected by higher US bond yields this week, and the SA rand and Turkish lira were the worst performers in our sample.
The South African Treasury’s forecast of wider fiscal deficits and growing debt drove the rand down significantly, as the market braced for imminent rating downgrades.
The Medium Term Budget Policy Statement (MTBPS) in South Africa presented a bleak prognosis for fiscal policy and opened the door for further weakening of local bonds and the rand, in our view. Despite the large moves on the day (ZAR was 2.5% weaker against USD, 10-year local bond yields around 34bp higher, and US$364mn of local bond outflows), we do not think valuations point to overshooting. We now project USDZAR rising towards 14.60 by end-2017.
The ZAR is likely to depreciate substantially on the back of forced outflows, hedging demand and waning optimism of a positive outcome from the December elective conference. After the initial sell-off, we project some recovery to 14.40 through Q3 2018 (our previous Q3 2018 forecast was 14.25).
Elsewhere, in Turkey, unexpected geopolitical risks, together with a worse macro backdrop, have hurt the Turkish lira, while the CBRT failed to tighten this week, forgoing an opportunity to stabilize the market.
The CBRT kept its interest rate parameters unchanged, but news that Germany was working to restrict funding for Turkey from European institutions hurt TRY. The Icelandic krona jumped on Friday after polls showed the ruling Independence Party leading ahead of the weekend’s general election.
Trade tips:
Short TRYRUB spot exchange rate, we recommend a short TRYRUB position, currently trading at 15.7086 on fundamental driving forces.
We target a 7.5% move lower to 14.5305, and place a stop loss at 16.1799.
Our trade horizon is 6-9 months. The position costs about 37bp per month in carry.
Short ZARMXN, targeting a move toward 1.29, we recommend a short ZARMXN position, currently trading at 1.3938.
We target a 7.5% move lower to 1.2893 and place a stop-loss at 1.4356.
Our trade horizon is 3-4 months. The position costs about 2bp per month in carry.
