FxWirePro: Snippets of BRICS FX and Trading Radar – Episode 1

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.

BRL: We remain mildly constructive BRL for year-end but mark-to-market forecasts to 3.80 for year-end and suspect the odds of a market-friendly candidate winning the election have lowered. Trade tensions, weaker growth, low carry, and domestic political unrest suggest a less-bullish stance relative our previous forecast, though significant negatives are priced and with the BCB at the ready, makes us more neutral BRL in the medium-term.

In Brazil, the BCB appears to be content to intervene in FX markets if the BRL becomes misaligned with fundamentals rather than hiking rates.

The persistent FX depreciation would threaten its inflation target, however, with our pass-through estimates indicating that a 10% NEER depreciation pushes inflation higher by around 120bp over four quarters.  The BRL has depreciated about 9.4% YTD, whereas the BCB’s Focus Survey indicates an increase of 12m inflation expectations of only 30bp. While the Brazilian Central Bank has increased its pace of FX swaps auctions meaningfully, in addition to providing repos to respond to market illiquidity in conjunction with the Treasury’s bond repurchase program. The BCB swap line is currently at $67bn, from $24bn 2-months ago (BRXSCS Index in Bloomberg).

Trade tips: Contemplating above factors, as the underlying USDBRL pair has constantly been spiking since January from the lows of 3.1928 levels to the current 3.8592 levels, on hedging grounds, activate longs in 1m USDBRL forward contracts with a view to arresting upside risks.

RUB: Russia stands out with less exposure to trade tensions as well as cheap valuation. Russian Ruble screens undervalued, it is also less exposed to global trade tensions and it has the stronger external position than other high yielders. A period of calm on the geopolitical front should also help improve sentiment. We would not be surprised to see further punitive geopolitical steps, but our base case is for a relatively mild impact. Valuations remain supportive. With oil prices staying high, RUB screens cheap in our BEER FV models at around 5% in REER terms.  

We have held a modest constructive view since early April via 1x1 USDRUB put spreads

Trade tips: 06-Sep-18 USDRUB 1x1 put spread (61.60/58.00), spot reference: 62.55.

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards 52 levels (which is bullish) while articulating (at 12:01 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex