Macro Commodities Forex Rates Equity Credit Derivatives 08 January 2010 Fixed Income & Forex Emerging Markets Weekly Important Notice: The circumstances in which this publication has been produced are such that it is not appropriate to characterise it as independent investment research as referred to in European MIF directive and that it should be treated as a marketing material even if it contains a research recommendation www.sgresearch.socgen.com TWD – Fade the intervention Editorial Efforts by Taiwans central bank (Central Bank of the Republic of China, Taiwan) to quell appreciation pressure on the TWD runs counter to fundamental currency support from improving economic conditions and persistent portfolio inflows. We will look to use any consolidation or corrective move in spot to add to bullish TWD trades. Our preferred trade is long TWD against an equally weighted basket of JPY, EUR and USD. FX trade summary A new year has started, but our bias on EMEA currencies is the same - we stay bullish. We continue to believe that the PLN, HUF, TRY and ILS have further upside potential. In Asia, we recommend selling USD/CNY NDF 6mo 6mo forward as we remain confident that PBOC will reinitiate managed appreciation of the CNY this year. In the vol space, we find the USD/MXN implied vol expensive and recommend selling it. CEEMEA supply outlook for Q1 and local rates strategy Poland - Prospects of lower general government deficit reinforce our positive view on Polish bonds. Czech Republic - Supply should not drive ASW higher. Prefer curve strategy to outright positions. Hungary - Light issuance is bond positive. Turkey Lower planned roll-over ratio than 2009 but the IMF loan agreement remains key. South Africa Supply pressure to remain but value in short-end receiver. Israel - Redemptions are concentrated in H1. Short-end to remain pressure on further hike prospects. FX technical analysis TRY/ZAR should rise to 5.08 and then to the 5.22/24 region, with a step at 5.19. EUR/CZK The 26.58/76 resistance area should cap the upside and force EUR/CZK to point back to the mid-September low of 24.95 The TWD was a slight underperformer vs the Asian dollar index in 2009 30.0 30.5 31.0 31.5 32.0 32.5 33.0 33.5 34.0 34.5 35.0 Jan-08 May-08 Oct-08 Feb-09 Jun-09 Nov-09 100 102 104 106 108 110 112 114 116 USD/TWD Asia Ccy Index Source: SG Cross Asset Research Portfolio inflows to leverage closer economic ties with China have been strong -20000 -15000 -10000 -5000 0 5000 10000 15000 20000 25000 Apr-05 Mar-06 Mar-07 Feb-08Jan-09 Jan-10 4000 5000 6000 7000 8000 9000 10000 Portfolio flows TAIEX Source: SG Cross Asset Research Contents View and Trade Summary EM Research Team View and Trade Summary 2 31/12/09 07/01/10 Coming week Coming month Gaëlle Blanchard (44) 20 7676 7439 Weekly Calendar 4 EUR/PLN 4.1047 4.1129 Murat Toprak (44) 20 7676 7491 Central Bank Watch 7 EUR/HUF 269.88 269.74 Esther Law (44) 20 7676 7396 Editorial 8 EUR/CZK 26.344 26.308 Jaroslaw Janecki (48) 2 2528 4162 FX Strategy 9 USD/TRY 1.4986 1.4708 Jan Vejmelek (420) 2 2200 8568 Technical Analysis 13 USD/RUB 30.035 29.775 Anne-Francoise Blüher (420) 2 2200 8524 FX Quantsight 14 USD/MXN 13.0817 12.7559 Jiri Skop (420) 222 008 569 Fixed Income Strategy 15 USD/CLP 507.45 492.85 Maxim Oreshkin (7495) 725 5637 Issuance Calendar 19 PLN 5Y 5.75 5.68 Patrick Bennett (852) 21 66 57 97 Rates Quantsight 20 HUF 5Y 7.225 7.04 Greg Anderson +1 212 278 5715 Economic Data Preview 21 CZK 5Y 3.01 3.19
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Macro Commodities Forex Rates Equity Credit Derivatives
08 January 2010
Fixed Income & Forex Emerging Markets Weekly
Important Notice: The circumstances in which this publication has been produced are such that it is not appropriate to characterise it as independent investment research as referred to in European MIF directive and that it should be treated as a marketing material even if it contains a research recommendation www.sgresearch.socgen.com
TWD – Fade the intervention
Editorial
Efforts by Taiwan�s central bank (Central Bank of the Republic of
China, Taiwan) to quell appreciation pressure on the TWD runs
counter to fundamental currency support from improving economic
conditions and persistent portfolio inflows. We will look to use any
consolidation or corrective move in spot to add to bullish TWD
trades. Our preferred trade is long TWD against an equally weighted
basket of JPY, EUR and USD.
FX trade summary
A new year has started, but our bias on EMEA currencies is the same
- we stay bullish. We continue to believe that the PLN, HUF, TRY and
ILS have further upside potential. In Asia, we recommend selling
USD/CNY NDF 6mo 6mo forward as we remain confident that PBOC
will reinitiate managed appreciation of the CNY this year. In the vol
space, we find the USD/MXN implied vol expensive and recommend
selling it.
CEEMEA supply outlook for Q1 and local rates strategy
Poland - Prospects of lower general government deficit reinforce our
positive view on Polish bonds. Czech Republic - Supply should not
drive ASW higher. Prefer curve strategy to outright positions.
Hungary - Light issuance is bond positive. Turkey � Lower planned
roll-over ratio than 2009 but the IMF loan agreement remains key.
South Africa � Supply pressure to remain but value in short-end
receiver. Israel - Redemptions are concentrated in H1. Short-end to
remain pressure on further hike prospects.
FX technical analysis
TRY/ZAR should rise to 5.08 and then to the 5.22/24 region, with a
step at 5.19. EUR/CZK � The 26.58/76 resistance area should cap
the upside and force EUR/CZK to point back to the mid-September
low of 24.95
The TWD was a slight underperformer vs the Asian dollar index in 2009
30.030.531.031.532.032.533.033.534.034.535.0
Jan-08 May-08 Oct-08 Feb-09 Jun-09 Nov-09100
102
104
106
108
110
112
114
116USD/TWDAsia Ccy Index
Source: SG Cross Asset Research
Portfolio inflows to leverage closer economic ties with China have been strong
-20000
-15000-10000-5000
0
5000
10000
15000
20000
25000
Apr-05 Mar-06 Mar-07 Feb-08Jan-09 Jan-10
4000
5000
6000
7000
8000
9000
10000Portfolio flowsTAIEX
Source: SG Cross Asset Research
Contents View and Trade Summary EM Research Team View and Trade Summary 2 31/12/09 07/01/10 Coming week Coming month Gaëlle Blanchard (44) 20 7676 7439 Weekly Calendar 4 EUR/PLN 4.1047 4.1129 Murat Toprak (44) 20 7676 7491 Central Bank Watch 7 EUR/HUF 269.88 269.74 Esther Law (44) 20 7676 7396 Editorial 8 EUR/CZK 26.344 26.308 Jaroslaw Janecki (48) 2 2528 4162 FX Strategy 9 USD/TRY 1.4986 1.4708 Jan Vejmelek (420) 2 2200 8568 Technical Analysis 13 USD/RUB 30.035 29.775 Anne-Francoise Blüher (420) 2 2200 8524 FX Quantsight 14 USD/MXN 13.0817 12.7559 Jiri Skop (420) 222 008 569 Fixed Income Strategy 15 USD/CLP 507.45 492.85 Maxim Oreshkin (7495) 725 5637 Issuance Calendar 19 PLN 5Y 5.75 5.68 Patrick Bennett (852) 21 66 57 97 Rates Quantsight 20
HUF 5Y 7.225 7.04
Greg Anderson +1 212 278 5715 Economic Data Preview 21 CZK 5Y 3.01 3.19
Emerging Markets Weekly
08 January 2010 2
FX Views and Recommendations Go short USD/MXN vol. We have entered another short implied volatility position in USD/MXN by taking the implied
vol receiver side of a vol swap. This swap is essentially a one-year, with an expiry of 31-Dec-10. We entered the swap
at Thursday's close at a 16.6 vol reference rate (bid offer was 16.6/17.6 for the vol swap and 15.9/16.3 for vanilla). We
target a realised volatility of 10% in 2010 and intend to hold this trade for the entire year to hopefully accrue a steady
drip of profits into our portfolio.
Sell USD/CNY NDF 6mo 6mo forward. Entry -1.75%, target -5.0%, stop -0.9%. We remain confident that PBOC
will reinitiate managed appreciation of the CNY this year. The initial move may be a discrete revaluation of USD/CNY
lower as was the case in 2005. Given the depreciation of the CNY on a trade-weighted basis since July 2008, a discrete
move would be an appropriate first step, meaning the subsequent appreciation could be delivered in a measured
fashion.
Stay long PLN, HUF, TRY and ILS currencies. A new year has started, but our bias on EMEA currencies is the
same - we stay bullish. We continue to believe that the PLN, HUF, TRY and ILS have further upside potential.
Take profit on CZK/HUF position. Our positive view on the HUF, expressed via a short CZK/HUF position, reached
the target. We recommend closing this position as the support located around 10.20 is strong. However, we are still
short EUR/HUF with a target of 265 as we continue to believe the HUF has further upside potential.
FX spot strategies
Cross Position Date Entry Target Stop Current P/L week * P/L total
New positions this week
Old positions
EUR/HUF Short 11-Dec 273 265 280 270.0 0.00% 1.10%
MXN/CLP Long 26-Nov 38.00 42.00 36.00 38.54 -0.57% 1.42%
KRW/SGD Long 26-Nov 0.12 0.1290 0.1155 0.1232 1.48% 2.67%
KRW/CLP Long 26-Nov 0.4257 0.4500 0.4135 0.4387 0.37% 3.05%
USD/PEN Short 12-Nov 2.8725 2.7500 2.9310 2.8670 0.69% 0.19%
TRY/ZAR Long 11-Nov 4.98 5.30 4.82 5.05 2.43% 1.41%
EUR/PLN Short 9-Oct 4.24 4.00 4.36 4.10 0.00% 3.30%
USD/ILS Short 25-Sep 3.77 3.62 3.84 3.71 2.11% 1.59%
Positions closed
CZK/HUF Short 11-Dec 10.59 10.25 10.76 10.25 3.21% 3.21%
EUR/KRW Short 28-Oct 1760 1665 1850 1665 -0.54% 5.40%
Total P/L 2.33%
* since last Thursday close
FX option strategies
Cross Position Structure Date Spot Entry ATMF Vol Entry
Expiry (close)
Cost Valuation P/L week * P/L total
New positions this week
USD/MXN Short
implied
vol swap 7-Jan 12.79 16.6 31-Dec-10 0.00% 0.00% 0.00% 0.00%
Old positions
USD/MXN Short
implied
vol swap 23-Oct 12.89 15.5 25-Jan-10 0.00% 3.21% 1.23% 3.21%
USD/TRY Long implied vol swap 23-Oct 1.4648 14.3 25-Jan-10 0.00% -3.86% -1.27% -3.86%
USD/BRL ** Short vol double no
touch
19-Nov 1.7268 17.9 20-May-10 2.50% 4.32% 1.68% 1.82%
Positions closed
Q4 2009 total 4.89%
Total P/L 6.06%
* since last publication
** For P&L purposes, assume a notional that is 10% of a vanilla notional. A 33.3% price of a DNT is is therefore 3.33% and payoff is 10% instead of 100%.
Emerging Markets Weekly
08 January 2010 3
FI Views and Recommendations
South Africa: Maintain 1y1y forward receiver. This trade plays well with the different monetary policy cycle theme
between CEEMEA and Asia/LatAm peers (notably Brazil and Korea). We think that easing bias remains for the SARB.
Carry considerations are also very attractive, as highlighted in the performance of the EM quant fund (see Rates QuantSight 6 January 2010).
Turkey vs South Africa: Take profit on long R201 vs TURKGB11 8/14 relative value trade. We closed this RV
trade as the dislocation has been normalised. As discussed in our Fixed Income Outlook 2010, we prefer Turkish debt
over South Africa peers from an inter-region perspective. Expectations for an IMF loan agreement are positive for
Turkish local debt while supply pressure is likely to weigh on South Africa peers (see Fixed Income Strategy page for
details).
Hungary: Hold 13/D. Although non-resident holdings of local debt are yet to show signs of a pick-up, supply
considerations are very favourable for local government bonds during at least Q1 2010. Stay long 13/D and see any sell-
off above 7.10% as an opportunity to increase the position.
Poland: Maintain PLN 3s5s7s standard barbell (receive 5s vs 2s and 10s). This strategy plays well with our
positive view on PLN local rates, especially in the immediate segment of the curve. We see potential for the short-end to
underperform the rest of the curve due to potential change in monetary policy bias later in 2010. Inter-region, we like
receiving PLN 5y IRS vs paying RUB cross-currency swaps towards March (See Fixed Income Strategy page).
Position Date Entry Unit Target Stop Current P/L week (bp)*
P/L total (bp)
Est. 3m carry (bp)
Existing positions
PLN - EUR 5y5y forward 30 Mar 160 bp 60 130 127 1 33 -1
Receive ZAR 1y1y forward 21 Jul 8.15 % 7.75 8.40 8.10 -3 5 20
Receive ZAR 2s5s10s PCA barbell Ratio: 0.62:2:0.47
15 Sep -50 bp -70 -40 -64 4 14 3
EUR 2s10s flattener vs PLN 2s10s steepener box
17 Sep -99 bp -65 -85 -75 -1 24 7
Buy HGB6.75 2/13 (13/D) 6 Nov 7.08 % 6.70 7.25 7.05 -5 3 4
Receive PLN 3s5s7s standard barbell 12 Nov 25 bp 10 30 25 1 0 0
Positions closed Entry date
Entry Unit Target Stop Closed level Closed date P/L total (bp)
Receive CZK 1y1y forward 23 Jul 2.81 % 2.65 2.90 2.90 17 Aug -9 22
Sell PLN 2-5-10yr swap Barbell 16 Apr 35 bp 18 45 50 18 Aug -15 -2
CZK 5s10s steepener 25 Jun 48 bp 60 40 40 18 Aug -8 --
PLN rec 3x6 vs pay 6x9 15 May 0.0 bp -10 5 -10.0 25 Aug 10 --
HUF 2s5s flattener 20 Mar -14 bp -40 -7 -7 31 Aug -8 8
Buy POLGB5.75 3/10 vs Eonia 6 Apr 280 bp 50 300 45 16 Sep 235 --
Buy: DS1019 vs Sell: DS1015 in ASW (risk neutral)
30 Jul 44.5 bp 20 54 34 22 Sep 11 0
RUB 6m vs 3y NDF flattener 17 Sep 126 bp 50 170 62 8 Oct 64 30
Receive CZK 3x6 FRA 2 Sep 2.03 % 1.75 2.15 1.78 8 Oct 25 --
Pay CZK 5y versus PLN 5y IRS Ratio 1:0.55 9 Oct -20 bp -40 -10 -10 20 Oct -10 0
Buy: PS0414 vs Sell DS1013 & DS1015 (DV01 neutral)
21 Apr 7.2 bp -4 11 3.6 12-Nov 4 --
Receive CZK 1y1y forward 12 Nov 2.70 % 2.40 2.85 2.47 11-Dec 23 14
Pay HUF 3x6 FRA^ 18 Sep 6.35 % 7.00 6.10 6.30 18-Dec -5 --
Switch TURKGB11 8/14 into R201 16 Oct -56 bp -180 -160 -192 31-Dec 136 --
* since last publication ** P/L calculated without carry ^ expires on 18 Dec 09
Source: SG Cross Asset Research, Bloomberg, Reuters
Emerging Markets Weekly
08 January 2010 4
Events and data EMEA
During the week Period Previous SG Forecast Consensus
Israel GDP Annualized 3Q F 3.0% na na Ukraine Industrial Production (YoY) DEC 8.6% na 6.7%
Monday 11-Jan-2010 (GMT) Period Previous SG Forecast Consensus
8:00 Czech Republic CPI (MoM) DEC 0.2% 0.1% 0.2% 8:00 Czech Republic CPI (YoY) DEC 0.5% 0.9% 1.0% 8:00 Czech Republic Unemployment Rate DEC 8.6% 9.3% 9.3% 8:00 Hungary Trade Balance (Mln Euros) NOV P 471.0M na 400.0M 8:00 Romania Net Wages (YOY) NOV 3.6% na na 8:00 Romania Trade Balance (Mln Euros) NOV -904.8 na na 8:00 Turkey Current Account NOV 0.7B na -1.5B
Tuesday 12-Jan-2010 (GMT) Period Previous SG Forecast Consensus
Israel Trade Balance DEC -$562M na na 8:00 Romania Consumer Prices (MoM) DEC 0.7% na na 8:00 Romania Consumer Prices (YoY) DEC 4.7% na na
11:00 South Africa Manufacturing Prod. SA (MoM) NOV 0.4% na -0.4% 11:00 South Africa Manufacturing Prod. NSA (YoY NOV -9.3% na -5.7%
Wednesday 13-Jan-2010 (GMT) Period Previous SG Forecast Consensus
Russia Weekly CPI (WoW) na na na Russia Weekly CPI Year-to-Date na na na
8:00 Czech Republic Retail Sales (YoY) NOV -4.7% 1.9% -1.0% 8:00 Romania Industrial Output (MoM) NOV 0.2% na na 8:00 Romania Industrial Output (YoY) NOV -1.5% na na
13:00 Hungary Hungarian MPC Meeting Minutes na na na
Thursday 14-Jan-2010 (GMT) Period Previous SG Forecast Consensus
Russia Gold & Forex Reserve USD na na na 8:00 Czech Republic Industrial Output (YoY) NOV F 0.2% -2.7% na 8:00 Czech Republic Construction Output (YoY) NOV 0.1% 2.0% na 8:00 Hungary Consumer Prices (MoM) DEC 0.3% na 0.1% 8:00 Hungary Consumer Prices (YoY) DEC 5.2% na 5.7%
13:00 Poland CPI (MoM) DEC 0.3% 0.1 na 13:00 Poland CPI (YoY) DEC 3.3% 3.5 na 13:00 Poland Money Supply - M3 (MoM) DEC -1.6% 0.9 na 13:00 Poland Money Supply - M3 (Level) DEC 699732 706206 na 17:00 Turkey Base Rate 6.5% 6.5% na
Friday 15-Jan-2010 (GMT) Period Previous SG Forecast Consensus
Russia Official Reserve Assets DEC 447.8B na 441.8B Russia Exports (USD) NOV 30.4B na 31.0B Russia Imports (USD) NOV 19.2B na 19.7B Russia Balance (USD) NOV 11.1B na 11.1B Romania Current Account (EUR)(YTD) NOV -3954M na na
8:00 Czech Republic PPI (Industrial) (MoM) DEC 0.4% -0.1% 0.0% 8:00 Czech Republic PPI (Industrial) (YoY) DEC -2.4% -1.0% -0.9% 8:00 Czech Republic Export Price Index (YoY) NOV -3.2% na na 8:00 Czech Republic Import Price Index (YoY) NOV -8.1% na na 8:00 Hungary Industrial Output (MoM) NOV F na na na 8:00 Hungary Industrial Output (YoY) NOV F na na na 8:00 Turkey Unemployment Rate OCT 13.4% na 13.8% 9:00 Czech Republic Current Account Monthly (CZK) NOV 12.41B -6.6B -2.75B
12:00 Israel Consumer Prices (MoM) DEC 0.3% na na 12:00 Israel Consumer Prices (YoY) DEC 3.8% na na 13:00 Poland Current Account (Euro) NOV -991 -724 na 13:00 Poland Imports (Euro) NOV 9776 9376 na 13:00 Poland Exports (Euro) NOV 8957.0 8357 na 13:00 Poland Balance (Euro) NOV -819 -1019 na 14:00 Poland Budget Perf. (Year to date) DEC 89.8% na na 14:00 Poland Budget Level (Monthly Total) DEC -498.2M na na 14:00 Poland Budget Level (Year to date) DEC -24417.M na na
Emerging Markets Weekly
08 January 2010 5
Latin America
Monday 11-Jan-2010 (GMT) Period Previous SG Forecast Consensus
Colombia National Holiday 13:00 Brazil Trade Balance (FOB) - Weekly na na na 15:00 Mexico Trade Balance NOV F 92.9M na na 19:30 Brazil FIPE CPI - Weekly 0.17% na na
Tuesday 12-Jan-2010 (GMT) Period Previous SG Forecast Consensus
10:00 Brazil FGV Preview Inflation IGP-M -0.16% na na 15:00 Mexico Gross Fixed Investment OCT -11.60% na -9.4% 15:00 Mexico Industrial Production (YoY) NOV -5.20% na -3.9%
Wednesday 13-Jan-2010 (GMT) Period Previous SG Forecast Consensus
11:00 Brazil IBGE Inflation IPCA (MoM) DEC 0.41% na 0.37% 11:00 Brazil IBGE Inflation IPCA (YoY) DEC 4.22% na 4.32%
Thursday 14-Jan-2010 (GMT) Period Previous SG Forecast Consensus Argentina Consumer Confidence JAN 40.22 na na 11:00 Brazil Retail Sales (YoY) NOV 8.40% na na 11:00 Brazil Retail Sales (MoM) NOV 1.40% na na 15:00 Mexico Global Economic Indicator IGAE OCT -5.50% na -4.50% 21:00 Chile Nominal Overnight Rate Target 0.50% 0.50% 0.50%
Friday 15-Jan-2010 (GMT) Period Previous SG Forecast Consensus 10:00 Brazil FGV Inflation IGP-10 (MoM) JAN -0.07% na na 11:30 Chile Copper Exports DEC $2847.2 na na 15:00 Mexico Overnight Rate 4.50% 4.50% 4.50% 19:00 Argentina Economic Activity Indx YoY NSA NOV 0.60% na na 19:00 Argentina Consumer Price Index (MoM) DEC 0.80% na na 19:00 Argentina Consumer Price Index (YoY) DEC 7.10% na na 19:00 Argentina Wholesale Price Index (MoM) DEC 0.90% na na 19:00 Argentina Wholesale Price Index (YoY) DEC 8.50% na na
Emerging Markets Weekly
08 January 2010 6
Asia
During the week Period Previous SG Forecast Consensus
China Business Climate Index 4Q 124.4 na na China Entrepreneur Confidence Index 4Q 120.1 na na China Trade Balance (USD) DEC $19.09B $11.5B $20.00B China Exports YoY% DEC -1.2% -4.0% 5.0% China Imports YoY% DEC 26.7% 35.0% 31.8% China New Yuan Loans DEC 294.8B 350B 310.0B China Money Supply - M0 (YoY) DEC 15.0% na na China Money Supply - M1 (YoY) DEC 34.6% na na China Money Supply - M2 (YoY) DEC 29.7% 29.0% 27.9% Indonesia Money Supply - M1 (YoY) NOV 5.8% na na Indonesia Money Supply - M2 (YoY) NOV 11.5% na na Indonesia Cement Consumption (Mln Tons) DEC 3.812 na na China Foreign Exchange Reserves DEC $2273.0 na $2420.0 China Actual FDI YTD YoY DEC -9.9% -7.5% -8.6% Thailand Total Car Sales DEC 57031 na na South Korea Department Store Sales YoY DEC 6.4% na na South Korea Discount Store Sales YoY DEC -2.8% na na
Monday 11-Jan-2010 (GMT) Period Previous SG Forecast Consensus
4:01 Malaysia Industrial Production YoY NOV 0.7% na 3.3% 4:01 Malaysia Manufacturing Sales Value YoY% NOV -3.7% na na
Tuesday 12-Jan-2010 (GMT) Period Previous SG Forecast Consensus
No planned event
Wednesday 13-Jan-2010 (GMT) Period Previous SG Forecast Consensus
4:30 South Korea Unemployment Rate (SA) DEC 3.50% na na 7:30 Thailand Benchmark Interest Rate 1.25% 1.25% 1.3%
Thursday 14-Jan-2010 (GMT) Period Previous SG Forecast Consensus
3:00 South Korea Export Price Index (YoY) DEC -13.4% na na 3:00 South Korea Export Price Index (MoM) DEC 0.2% na na 3:00 South Korea Import Price Index (YoY) DEC -7.5% na na 3:00 South Korea Import Price Index (MoM) DEC 1.9% na na
Friday 15-Jan-2010 (GMT) Period Previous SG Forecast Consensus
5:00 Singapore Retail Sales (YoY) NOV -4.4% na na 5:00 Singapore Retail Sales (MoM) sa NOV 6.0% na na 5:00 Singapore Electronic Exports (YoY) DEC -6.1% na na 5:00 Singapore Non-oil Domestic Exports (YoY) DEC 8.7% na na 5:00 Singapore Non-oil Domestic Exp SA (MoM) DEC 19.8% na na
Source: SG Cross Asset Research, KB, Bloomberg
Emerging Markets Weekly
08 January 2010 7
Central bank watch Rating^ Outlook Country Next Meeting Last move (bp) Current Rate (%) SG View What is priced in (bp
over 3m)
A- Stable Poland 26 Jan 10 unchanged 3.50 No change in the coming months 4
BBB- Stable Hungary 25 Jan 10 -25 6.25 We expect 100bp more rate cuts in H1 -70
A Stable Czech Rep. 04 Feb 10 -25 1.00 No change 0
BB+ Negative Romania 03 Feb 10 -50 7.50 We expect 100bp more rate cuts in H1 NA
BBB Negative Russia NA -50 8.75 We expect there to be a total of 25bp cuts left NA
BB- Stable Turkey 14 Jan 10 unchanged 6.50 We expect steady rates 0
BBB+ Negative South Africa 26 Jan 10 unchanged 7.00 Key rate bottoming at 6.50% in the next 3-6 months -19
A Stable Israel 25 Jan 10 25 1.25 We expect a 100bp hike in H1 2010 52
BBB- Stable Brazil 27 Jan 10 unchanged 8.75 First hike of 25bp in June, will tighten by 150bp in 2010 50
A+ Stable Chile 14 Jan 10 unchanged 0.50 First hike of 25bp in June-10; total tightening of 125bp by end of 2010. NA
BBB- Stable Colombia 29 Jan 10 unchanged 3.50 First hike of 25bp in June, we expect 25bp/mo thereafter througout 2010 NA
BBB Stable Mexico 15 Jan 10 unchanged 4.50 First hike of 25bp in July, will hike by 125bp total in 2010 16
A+ Stable China NA -27 5.31
Rates will remain on hold at least through late 2010. A hike in the RRR is likley to be the first tightening following guidance on the
quality of loans in H1
0
BB- Positive Indonesia 04 Feb 10 unchanged 6.50
BI left rates on-hold on Dec3. The message from the central bank is that a softer inflation
outlook (5.5% in 2010) will mean delaying any tightening
0
A- Stable Malaysia 26 Jan 10 unchanged 2.00 Rates expected on-hold until late 2010, BNM says price pressures are benign 0
BB- Stable Philippines 28 Jan 10 unchanged 4.00
Rates remain on-hold. Comments from Deputy Governor following latest meeting were dovish saying BSP, "has a neutral
stance with an easing bias."
0
A Stable South Korea 11 Mar 10 unchanged 2.00BoK left rates on-hold on Jan 8, but language used by Governor Lee suggests an imminent
hike.35
AA- Negative Taiwan 25-30 Mar unchanged 1.25CBC indicated that policy will depend on
consumer prices, which are expected to stay subdued until at least mid-year
0
BBB- Negative India 29 Jan 09 unchanged 4.75 Previous RBI statement was hawkish, first hike is expected in Q1 35
BBB+ Negative Thailand 13 Jan 09 unchanged 1.25 Interest rates to remain on-hold until mid 2010 20
Source: SG Cross Asset Research, KB, Bloomberg, Reuters (as at 07 Jan 10 close.). ^S&P ratings are used
-80-60-40-20
020406080
100120
PLN HUF CZK ZAR ILS TRY
FRA
- pre
miu
m (b
p)
0
1
2
3
4
5
6
7
8
Key Policy rates (%)
3m 1m fw d* (LHS) 3m 2m fw d* (LHS) 3m 3m fw d* (LHS) Current base rate (RHS)
Emerging Markets Weekly
08 January 2010 8
TWD – Fade the intervention
Efforts by Taiwan’s central bank (Central Bank of the Republic of China, Taiwan) to quell appreciation pressure on the TWD runs counter to fundamental currency support from improving economic conditions and persistent portfolio inflows. We will look to use any consolidation or corrective move in spot to add to bullish TWD trades. Our preferred trade is long TWD against an equally weighted basket of JPY, EUR and USD.
USD/TWD has been in the spotlight since late last year, in the main due to the CBC’s focus on inflows from foreign investors and calls that parking funds in the money and bond market for an extended period will not be tolerated. It is the central bank’s prerogative to make such determinations, though through it all we don’t see any of the actions or warnings as likely to reverse a fundamentally positive outlook for the TWD. The TWD was only a mid-table performer (of gains against the USD) last year and some catch-up on the basis of strong fundamentals and inflow to the equity market was expected.
We reiterate the following from our 2010 Outlook: “TWD is the standout of the Asian currencies positioned to outperform on leverage to China, and is a beta play on the global economic cycle if the global recovery extends in the coming months. The currency posted a modest performance in 2009, gaining 2.9% against the USD, including a 6.5% rally off lows recorded in mid-March (ADXY +3.0% in 2009 and +9.0% off March lows). We forecast USD/TWD to reach 31 in June and 30.5 in December 2010, TWD gains of 3.9% and 5.6% respectively.”
Graph 1. The TWD was a slight underperformer vs the Asian dollar index in 2009
30.030.531.031.532.032.533.033.534.034.535.0
Jan-08 May-08 Oct-08 Feb-09 Jun-09 Nov-09100
102
104
106
108
110
112
114
116USD/TWDAsia Ccy Index
Source: SG Cross Asset Research
Strength in TWD is not a surprise to us, but the pace of
gains has been noteworthy.
USD/TWD reached 31.731 on 4 January, extending a strong move through 32.00 that occurred on 31 December (the previous day’s spot traded around 32.30). The strength in the TWD is not a particular surprise to us, but the pace of gains has been noteworthy, and raised the ire of the central bank. The central bank deems foreign investors
parking funds in the domestic money market for extended periods as speculation, and there has been discussion in the market as to how it will be curbed. One suggestion is that Taiwan’s financial regulators and the central bank are considering a ban on foreign funds buying bonds. We think this is very unlikely.
The Taiwanese central bank was buying USD/TWD in the market last week, which is no surprise as it is one of the more interventionist central banks in a region well known for intervention. But we don’t believe the bank is seeking to reverse the TWD gains - rather to slow the appreciation.
Portfolio inflows will underpin TWD gains.
Taiwan’s FX reserves surged in 2009 at the same time as portfolio inflows returned after the large outflow in 2008. Foreign portfolio inflow to the Taiwan equity market was a moderate $15.4bn in 2009, which failed to cover the $16.5bn of outflow in 2008. Of note was that the last two weeks of 2009 recorded $2.5bn of inflow between them. Meanwhile, $1.3bn of inflow was already recorded in the first four days of this year. The central bank has said repeatedly that it will continue to monitor foreign fund inflows - as will we.
We expect portfolio inflows to have a more pronounced – and positive - impact on the TWD this year as the huge build up of FX reserves in 2009 (+$56.5bn to $348.2bn) is not likely to be repeated. That is assuming that the recovery in exports is sustained.
Graph 2. Portfolio inflows to leverage closer economic ties with China have been strong
-20000
-15000
-10000
-5000
0
5000
10000
15000
20000
25000
Apr-05 Mar-06 Mar-07 Feb-08 Jan-09 Jan-10
4000
5000
6000
7000
8000
9000
10000Portfolio flowsTAIEX
Source: SG Cross Asset Research
A key source of portfolio inflow to Taiwan will be
Chinese QDII flows.
China's Qualified Domestic Institutional Investors (QDIIs) will become eligible to invest in Taiwan stocks after a cross-strait financial memorandum of understanding takes effect on 16 January. We expect some of the flow that has come to the market during the last couple of weeks is front-running this eligibility. But the more important message is that improving relations between China and Taiwan almost certainly favour the junior partner. This is a long-term positive for Taiwan assets and the TWD.
Emerging Markets Weekly
08 January 2010 9
FX Strategy
EUR/CZK
CZK depreciation is temporary
EUR/CZK is close to its 1Y high. The Czech crown eased late in December to almost 26.50 EUR/CZK due to a correction on the world market and an interest rate cut delivered before Christmas. The start of 2010 did not bring any new or significant developments on the Czech FX market. As the EUR/CZK exchange rate was unable to break 26.40, it stabilised just below this level.
The factors behind the recent CZK depreciation were temporary, in our view. Key central bankers vice governor Mojmir Hampl and vice governor Miroslav Singer have clearly stated that Czech rates have hit the bottom. According to the CNB’s forecast the next move should be up, with the first hike probably coming in H210. This is in line with our view. The macroeconomic framework is improving thanks to the global easing of monetary and fiscal policy, which has supported the car industry in particular. The flash estimate of Czech industrial production for November was +0.2% yoy, the first increase since September 2008. Meanwhile, PMI indices for December moved above the 50 threshold for the second consecutive month. The industrial output is driven by car exports stimulated by car scrapping schemes abroad. November exports stagnated on a year-on-year basis after 12 months declines.
Important economic indicators which should create some support for the Czech currency are due next week. The expected increase in CPI should strengthen speculation that the central bank will soon tighten monetary policy. The November retail sales figure should be in the black for the first time in the past year. Unemployment is set to jump in December, mainly due to seasonal factors. However, the underlying unfavourable trend on the labour market is gradually diminishing.
We are bearish on the EUR/CZK. The EUR/CZK exchange rate is close to its 1Y high, the macroeconomic picture is better, there is rising speculation that monetary easing is coming to an end and our house view on emerging markets (mainly in Asia, excluding Japan) is bullish. These factors are what underpin our bearish EUR/CZK outlook for next few weeks and months. However, as the CZK is a low-yielding currency it should underperform neighbouring currencies such as the PLN and HUF. The biggest risks for our outlook are still-volatile risk appetite and the elimination of the global fiscal stimulus, which would cool economic growth.
Graph1. Czech industry is rebounding
25
34
43
52
61
70
Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09-30%
-20%
-10%
0%
10%
20%
PMI (left scale)PMI output (left scale)Industry (y/y, wda)
Source: CSO, EcoWin, KB Economic&Strategy Research
Graph2. Czech foreign trade will record the best ever result in 2009
0
30
60
90
120
150
January March May July September November
CZK
bn,
YTD
cum
ul
2006 2007 2008 2009
Source: CSO
Graph3. Czech inflation has bottomed out
-6%
-3%
0%
3%
6%
9%
Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
CPI PPI
Source: CSO
Emerging Markets Weekly
08 January 2010 10
USD/MXN: a trade to exploit the continued normalisation of volatility
Implied vols remain high but are beginning to fall
The 2008/2009 financial crisis had a profound impact on LatAm currency markets, including USD/MXN. Spot USD/MXN rose 50% within a few months. The abruptness of the move in spot caused implied volatility to spike, as the benchmark 3-month at-the-money-forward (atmf) vol rose from 15 to 55. Spot USD/MXN began recovering lower in Q209 and initially implied vol normalised quickly. However, the normalisation basically ended in July, with implied vols settling in the 15-20 range, which is much higher than the 6-11 range that prevailed in the two years prior to the crisis. In fact, implied vols remain higher than they were in the 2000 through 2005 period - which included a major recession, a war and associated volatility – as well. But in the early days of 2010, we are beginning to see a drift lower in implied vols across the curve, but particularly in the intermediate tenors. The 3-month atmf vol has fallen from 15.6 on New Year’s Eve to 14.3 on 7 January. The 1-year implied vol has declined too, from 16.8 to 16.1.
Realised volatility for 2010 should be 12% or lower
Although implied vols have declined, they still trade abnormally rich relative to historical vols across most tenors. Annualised daily volatility has been consistently in the 10%-14% range since May. As a consequence, an abnormally large premium has existed for months. General market uncertainty and a fear of Mexico getting downgraded helped preserve the premium and also caused considerable volatility in the FX market. But now the downgrade is ancient history and the expected course of USD-MXN is a slow and steady downtrend. Actual volatility was consistently in the 6% to 10% range from 2004 to 2008, when USD-MXN was slowly trending lower. Although changes in market structure and participation have occurred since the crisis, we see no reason that actual volatility (standard deviation of daily closing rate returns over all trading days in the calendar year) can’t remain at around the 12% it was during the last seven months of 2009. With improving liquidity and economic fundamentals, we think 10% actual volatility is likely. But even in a worst case scenario, 2010 actual volatility should not exceed that of calendar years 2008 and 2009, when it was 19.4% and 16.1% respectively.
Portfolio trade: short USD/MXN implied via vol swap
To exploit the expected normalisation in implied vols, we have entered a new USD/MXN vol swap trade for our model portfolio. We are going short implied vol by receiving implied and paying realised volatility in an essentially 1-year vol swap that expires on 31 December of this year. Thursday’s closing market price for this trade was 16.6/17.6, based on a vanilla atmf vol bid offer of 15.9/16.3. With our 10% target for realised vol, we expect this trade to yield 6.6% of notional and accrue it in a relatively steady fashion. With a repeat of 2008’s volatility as a worst-case scenario, we see the reward:risk ratio of this trade at 2:1, with about a 90% probability of finishing in the money.
Graph 1. USD/MXN spot rate and implied options vol
8
9
10
11
12
13
14
15
16
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100%
10%
20%
30%
40%
50%
60%
USD-M XN spot (lhs)
M XN 3m implied vol (rhs)
Source: SG Cross Asset Research, Bloomberg
Graph 2. 3-month implied and historical volatility
0%
10%
20%
30%
40%
50%
60%
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10
3-mo historical volatility 3-mo implied vol
Source: SG Cross Asset Research, Bloomberg
Graph 3. USD/MXN implied vol curves for various dates
-
2
4
6
8
10
12
14
16
18
0 3 6 9 12
31-Dec-07 31-Dec-09 7-Jan-10
Source: SG Cross Asset Research, Bloomberg
Emerging Markets Weekly
08 January 2010 11
EUR/PLN 1 week view 1 month view
Relatively strong economy and
privatisation programme will drive PLN higher
The PLN’s strengthening trend has resumed since mid-December, thanks to strong domestic data releases and more favourable market sentiment in general. We expect this trend to continue and EUR/PLN to reach 4.00 in the coming weeks. From a macroeconomic standpoint, Poland will continue to be the region’s strongest economy in 2010 and, although we don’t see the central bank rushing into monetary tightening, we think it will be one of the first to hike interest rates. Carry dynamics will thus be a supportive factor for the PLN. Another potential supportive factor in 2010 is the ambitious privatisation programme. This will also be a key factor in limiting the budget deficit.
A key event for the start of the year will be the start of the new MPC in February. Only the governor of the central bank will retain his seat. This makes monetary policy forecasting a little more difficult. However, we expect the output gap to persist in 2010 and inflation to slow towards the 2.5% target in the coming months after the current peak – December CPI is due next week and is expected up to 3.6% yoy from 3.3%. Combined, these two factors will probably lead to unchanged interest rates for most of the year.
EUR/HUF 1 week view 1 month view
We see further upside potential for the HUF
The cautious approach of the central bank is also
HUF-supportive
Our positive view on the HUF, expressed via a short CZK/HUF position, reached the target. We recommend closing this position as the support located around 10.20 is strong. However, we are still short EUR/HUF with a target of 265 as we continue to believe the HUF has further upside potential. The underlying macroeconomic and financial situation continues to improve, albeit gradually. Comments by Moody’s that fiscal policy is taking the right direction are a good illustration of these improvements. The rating agency envisages a possible modification of the rating outlook in the course of this year. Admittedly, the general election in spring carries a risk but we do not believe the new government will disrupt the fiscal consolidation in any significant way. We expect only a marginal deviation from the target of a budget deficit of 3.8% of GDP.
The cautious approach of the central bank is also HUF-supportive. The NBH has decided to slow the pace of rate cuts, moving in steps of 25bp instead of 50bp. This change obviously has nothing to do with inflation. Although the CPI released on January 14 is likely to show an acceleration, underlying inflationary pressures are non-existent. The upward movement is essentially due to adverse statistical factors. The NBH certainly wants to smooth the rate cuts in order to ensure stability on financial markets ahead of the election. It is a wise approach.
EUR/RON 1 week view 1 month view
The RON’s upside will be limited by central bank
intervention and the compression of the carry
We expect EUR/RON to stabilise at around 4.15-
4.20 until the budget is approved.
The RON started the new year in bullish mode. The political situation has stabilised and prospects for the resumption of IMF/EU loan payments in February are good. Even the NBR’s surprise 50bp rate cut did not prevent EUR/RON from slipping to 4.15, from 4.25 at the end of December. Weak economic conditions and slowing inflation justified a rate cut, but we expected the move to come in February when the 2010 budget is set to be approved by parliament without major changes.
The end to the political turmoil and the pending resumption of IMF payments are good news for the RON, but there could be new hurdles in the implementation of the economic programme in coming months. Meanwhile, the economic outlook is still bleak as domestic demand will remain weak, notably due to the fiscal tightening. In this context, a significant appreciation of the currency is unwelcome and the central bank will probably continue to monitor it. The RON’s upside will also be limited by the compression of the carry, as further easing is in the loop - we expect a further 100bp of rate cuts to 6.50%. Overall, we expect only a modest appreciation of the RON to 4.00.
The coming week will be busy in terms of economic releases, with December CPI, November wages, trade balance and industry output figures scheduled. However, the key drivers of the RON will be developments on the budget and IMF side. We expect EUR/RON to stabilise at around 4.15-4.20 until the budget is approved.
USD/TRY 1 week view 1 month view
We stay bullish TRY
A new year has started, but our bias on the TRY is the same - we stay bullish. We continue to believe that the TRY is undervalued and the end of the rate cut cycle will drive it higher. As the recent eurobond auction showed, Turkey remains an attractive market despite all the market talk about the risks surrounding the lira. In December, we recommended selling USD/TRY above 1.50 and in the same vein we maintain that the currency has downward
Emerging Markets Weekly
08 January 2010 12
Government has political interest in signing
standby agreement with IMF
potential to 1.44 in the short term and 1.30 in the medium term. Depending on EUR/USD movement, this TRY-positive view can be expressed through a short EUR/TRY position. Another way would be to buy TRY vs ZAR.
Our view is based on two factors. First, we do not believe inflation will spiral out of control. In other words, the 2006 scenario will not be repeated. As a result, the central bank, which convenes this week, will keep the same policy stance and keep the base rate unchanged at 6.50%. Second, the fiscal deficit and debt levels remain manageable. Although the debt-to-GDP ratio is on the rise, it is no worse in Turkey than the other EMEA countries. Moreover, the IMF deal is pending and could offer strong support for the TRY. We believe Turkey has an interest in signing a standby agreement rapidly, and not just from the economic and financial points of view. From a political standpoint, it is crucial for the government. The IMF money would help it support the economy and be in a better position for the 2011 general elections.
USD/CLP 1 week view 1 month view
Fear of verbal intervention has us reluctant to chase
USD/CLP lower. Play the range by buying at 492
and selling at 500.
USD-CLP has kicked off the year by moving sharply lower. Spot CLP has already appreciated 3.0% as of Thursday’s close of 493. Last year’s 486 low is only 1% away. We don’t think it will be tested or eclipsed in the next week, because markets are likely to be reluctant to push USD/CLP into the range that triggered verbal intervention last year. The central bank meeting this Thursday offers the perfect opportunity to remind the market that the 2010 budget contains funds to be used for intervention. We don’t rule out a formal announcement of that intervention strategy, particularly if the 485 to 490 range is reached. With that in mind, we would advocate buying USD/CLP between 490 and 492 and selling at 500.
USD/CNY 1 week view 1 month view
Wait for 6.7000 to sell USD/CNY 1-year NDFs
Chinese officials remain very unlikely to bow to ongoing calls to allow strengthening in the CNY in the near future. The release of the December trade report this week could give the officials some breathing space. SG forecasts that exports fell 4.0 y/y and imports expanded 35% y/y. That will place further pressure on the trade surplus, which we forecast at $11.5bn vs $19bn in November.
Chinese thinktank researcher Zhang Bin, one of the commentators calling for a CNY revaluation, said last week that now is a good time for exchange rate reform. He suggested a one-off 10% rise in CNY, adding that it would have limited economic impact. Zhang Bin’s comments are his personal opinion and are unlikely to influence official policy. Although we expect China to reinitiate managed appreciation of the CNY this year – and potentially kick off that process with a one-off revaluation of 2%-3% - nothing is likely to change before there is some stability in the export data.
Since late December, 1-year USD/CNY NDFs have traded in a modest range centred around 6.6500. With current quotes pricing an approximate 2.7% strengthening in the CNY, but with the reinitiation of managed appreciation still some time away, we prefer to wait for any rally toward 6.7000 before entering shorts. We still like the short 6mo USD/CNY NDFs 6mo forward position entered at 1.5%, targeting 5% with a stop at 0.5%. That position is currently trading around 1.75%.
USD/KRW 1 week view 1 month view
KRW is set to extend gains in coming weeks;
use consolidation or a retrace in USD/KRW or
EUR/KRW to enter trades
USD/KRW is set to extend its downside move during the next weeks. The KRW is supported by improving economic fundamentals and attractive valuation vis-à-vis other Asian currencies. The monthly technical chart shows an especially bearish set-up for spot with the break below 1,166 opening potential to 1,064 on a potential multi-week horizon. 1,166 is a 61.8% retracement of the up-move from 899 in November 2007 to the 1,597 peak in March of last year.
While we are comfortable with USD/KRW shorts at the current spot level around 1,130 and recommend investors add to positions on any rally to 1,150-1,160, our preferred KRW trade is long vs. EUR and/or long KRW vs. an equally weighted basket of JPY, EUR and USD. Long KRW against EUR or against a basket of G3 helps to mitigate some of the risks associated with potential USD volatility – including any bouts of intervention by the BoK that could force short covering in USD/KRW.
Our recommended entry level for EUR/KRW is 1,660-1,670. For the KRW long against the G3 basket we will look to enter upon some consolidation or pullback in USD/KRW to 1,150-1,160.
[email protected], [email protected], [email protected], [email protected]
Emerging Markets Weekly
08 January 2010 13
Technical Analysis
TRY/ZAR: bullish signal TRY/ZAR should rise to
5.08 and then to the 5.22/24 region, with a step at 5.19. Given the break above the MT
declining resistance line, which
comes at 4.97 this week
(-0.02/week), the recovery
started at 4.85 in late November
is probably not over.
The bullish configuration of the
14-week RSI - which has broken
above the upper end of its MT
declining channel - strengthens
this scenario.
So we expect TRY/ZAR to gain
further ground in the next few
weeks and to initially return to
the 5.08 region (*).
After a possible consolidation
from this resistance zone, the
cross should break above it and
head towards the 5.22/24
resistance area (**), with 5.19 the
as the main step. (*) Mid-November high and
Fibonacci retracement.
(**) Pullback level and Fibonacci
retracement.
3rd support 2nd support 1st support Last 1st resistance 2nd resistance 3rd resistance
4.85 4.92 4.97 5.03 5.08 5.19 5.22/24
EUR/CZK: ST upside potential limited EUR/CZK – The 26.58/76
resistance area should cap the upside and force EUR/CZK to point back to the mid-September low of 24.95.
Despite the breach of the MT
declining resistance line, drawn
from 27.72 and coming at 26.28
this week (-0.035/week), we
think the upside potential is
limited.
We expect the 26.58/76
resistance area (*) to cap the
upside and force EUR/CZK to
point back to the mid-
September low of 24.95. The ST
support line, which comes at
25.79 this week (+0.05/week),
should be the main step on the
way.
EUR/CZK should then break
below 24.95 and target the July
low of 22.89.
(*) October 2009 high and MT
Fibonacci retracement.
3rd support 2nd support 1st support Last 1st resistance 2nd resistance 3rd resistance
25.58 25.79 26.11 26.30 26.58 26.76 27.10
[email protected] & [email protected]
WEEKLY CHART
14-week RSI
5.08
4.85
MT resistance line
5.46
5.22/24
5.19
MT resistance line
WEEKLY CHART
24.95
26.58/76
MT resistance line
22.89
23.70
29.67
ST support line
27.72
Emerging Markets Weekly
08 January 2010 14
FX Quantsight
EM crosses (1y valuation) EM crosses (7y valuation)
C ro s s ra teV a lu e
m a rk e t V a lu e
m o d e l z -s c o reP L N /M X N 4 .4 9 4 .3 2 1 .9 4P L N /C Z K 6 .4 2 6 .1 8 1 .8 1P L N /H U F 6 5 .7 8 6 3 .7 4 1 .5 5N Z D /T R Y 1 .0 8 1 .0 6 1 .0 1B R L /C Z K 1 0 .6 1 1 0 .4 0 0 .9 7B R L /M X N 7 .4 1 7 .2 7 0 .8 7P L N /J P Y 3 2 .2 1 3 1 .7 9 0 .7 5T R Y /M X N 8 .6 9 8 .5 8 0 .6 3C A D /T R Y 1 .4 2 1 .4 1 0 .4 7B R L /Z A R 4 .2 4 4 .1 9 0 .4 5J P Y /K R W 1 2 .3 3 1 2 .2 7 0 .2 3A U D /T R Y 1 .3 5 1 .3 4 0 .2 2T R Y /Z A R 4 .9 7 4 .9 5 0 .1 5M X N /C Z K 1 .4 3 1 .4 3 0 .0 5C H F /T R Y 1 .4 3 1 .4 2 0 .0 5N Z D /P L N 2 .0 9 2 .1 0 -0 .2 3T R Y /B R L 1 .1 7 1 .1 8 -0 .2 5M X N /H U F 1 4 .6 6 1 4 .7 5 -0 .3 0C Z K /H U F 1 0 .2 4 1 0 .3 1 -0 .3 8Z A R /J P Y 1 2 .5 5 1 2 .7 6 -0 .7 4B R L /P L N 1 .6 5 1 .6 8 -0 .7 6T R Y /J P Y 6 2 .3 7 6 3 .1 2 -0 .8 5E U R /T R Y 2 .1 2 2 .1 5 -0 .8 6
G B P /C Z K 2 9 .4 3 3 0 .0 7 -0 .8 9
A U D /P L N 2 .6 1 2 .6 6 -1 .0 1
C A D /P L N 2 .7 5 2 .8 1 -1 .0 1
M X N /C A D 0 .0 8 0 .0 8 -1 .0 2
H U F /J P Y 0 .4 9 0 .5 0 -1 .0 6
C H F /P L N 2 .7 6 2 .8 3 -1 .3 3
C Z K /J P Y 5 .0 1 5 .1 4 -1 .3 7
M X N /J P Y 7 .1 8 7 .3 6 -1 .6 0
G B P /P L N 4 .5 8 4 .8 7 -1 .9 0
C ro s s ra teV a lu e
m a rk e t V a lu e
m o d e l z -s c o reA U D /T R Y 1 .3 5 1 .2 2 2 .2 1B R L /C Z K 1 0 .6 1 9 .3 2 2 .2 1B R L /M X N 7 .4 1 6 .2 3 2 .0 6A U D /P L N 2 .6 1 2 .3 0 2 .0 1B R L /P L N 1 .6 5 1 .4 0 2 .0 1C A D /P L N 2 .7 5 2 .4 7 1 .9 6N Z D /T R Y 1 .0 8 1 .0 0 1 .7 7C H F /P L N 2 .7 6 2 .5 5 1 .6 9C A D /T R Y 1 .4 2 1 .3 1 1 .6 4J P Y /K R W 1 2 .3 3 1 1 .5 1 1 .6 4C H F /T R Y 1 .4 3 1 .3 5 1 .5 5N Z D /P L N 2 .0 9 1 .8 8 1 .4 9T R Y /M X N 8 .6 9 8 .3 8 0 .7 0B R L /Z A R 4 .2 4 4 .0 4 0 .3 9C Z K /H U F 1 0 .2 4 1 0 .0 2 0 .3 7P L N /M X N 4 .4 9 4 .4 4 0 .2 3E U R /T R Y 2 .1 2 2 .1 0 0 .1 9Z A R /J P Y 1 2 .5 5 1 2 .4 0 0 .1 0P L N /H U F 6 5 .7 8 6 6 .6 0 -0 .2 5M X N /C Z K 1 .4 3 1 .4 9 -0 .5 2M X N /H U F 1 4 .6 6 1 4 .9 8 -0 .5 8T R Y /Z A R 4 .9 7 5 .4 3 -0 .7 8P L N /C Z K 6 .4 2 6 .6 4 -0 .8 5
G B P /P L N 4 .5 8 4 .8 5 -0 .9 5
T R Y /B R L 1 .1 7 1 .3 4 -1 .0 5
G B P /C Z K 2 9 .4 3 3 2 .2 1 -1 .1 4
C Z K /J P Y 5 .0 1 5 .3 8 -1 .3 2
M X N /C A D 0 .0 8 0 .0 9 -1 .3 8
H U F /J P Y 0 .4 9 0 .5 4 -1 .5 9
P L N /J P Y 3 2 .2 1 3 5 .7 4 -1 .6 2
M X N /J P Y 7 .1 8 8 .0 4 -1 .6 3
T R Y /J P Y 6 2 .3 7 6 7 .3 6 -1 .8 1
PCA on EM vol (ATM, 3M, USD base) Risk premia for EM volatilities
V o la t i l i t y z -s c o r eV a lu e
m a r k e t (% )V a lu e
m o d e l (% )
M X N 1 .5 5 1 4 .8 7 1 1 .4 6P L N 0 .8 9 1 8 .6 8 1 7 .6 1H U F 0 .7 4 1 8 .8 7 1 8 .1 9IN R 0 .6 1 1 0 .8 8 1 0 .0 1C Z K 0 .5 7 1 5 .1 5 1 4 .7 1B R L 0 .5 3 1 6 .4 4 1 5 .6 9ID R 0 .2 7 1 3 .1 2 1 2 .5 3K R W - 0 .6 0 1 2 .3 7 1 3 .7 5Z A R - 0 .9 8 1 8 .8 6 2 0 .1 0S G D - 1 .5 8 6 .3 7 7 .0 6T R Y - 1 .6 7 1 2 .6 9 1 5 .6 3
Currency pair Expiry
Im plied vol (%)
Realised vol (%)
Risk prem ium
USD/KRW 2Y 13.8 24.3 0.6EUR/CZK 2Y 8.0 11.1 0.7EUR/HUF 2Y 12.3 15.0 0.8EUR/PLN 1Y 13.3 16.2 0.8USD/BRL 2Y 20.2 24.7 0.8EUR/PLN 2Y 12.9 15.4 0.8EUR/PLN 3m 13.3 10.5 1.3USD/BRL 6m 17.4 13.6 1.3EUR/CZK 6m 9.3 7.2 1.3USD/MXN 6m 15.4 11.8 1.3EUR/PLN 1m 13.5 9.7 1.4EUR/CZK 1m 10.5 6.3 1.7
Source: SG Cross Asset Research
Emerging Markets Weekly
08 January 2010 15
Fixed Income Strategy
CEEMEA supply outlook for Q1 and local rates strategy Key points:
Poland - Prospects of lower general government deficit reinforce our positive view on Polish bonds
Czech Republic – Supply should not drive ASW higher. Prefer barbell strategy to outright positions
Hungary – Light issuance is bond positive
Turkey – Lower planned roll-over ratio than 2009 but the IMF loan agreement remains key
South Africa – Supply pressure to remain but value in short-end receiver
Israel - Redemptions are concentrated in H1
Poland – prospects of lower general government deficit reinforces our positive view on Polish bonds
The latest state budget borrowing requirement plan released by the Ministry of Finance on 4 January states that 2010 borrowing needs have been revised down to PLN196.8bn from the PLN203.8bn estimated in the draft budget. This reduction is partly due to lower T-bills issuance in Q409, which will result in lower redemption in 2010. We expect the budget deficit to fall by around PLN10bn more following central bank governor Slawomir Skrzypek’s comment this week that the NBP is expected to make profits in 2009, compared with no profits as assumed previously in the draft budget. In a comment in the local paper, finance minister Jacek Rostowski said the general government deficit will fall to below 6% of GDP in 2010 from an expected 6.2% in 2009. This will surely take some supply pressure off the bond market, and it reinforces our preference for Polish rates over those of its CEEMEA peers.
For Q1 2010, the MoF maintains a flexible issuance schedule. The estimated gross bond issuance ranges from PLN16bn to PLN26bn, compared with the figure of PLN21.4bn for Q1 2009. There will be PLN12-18bn in short-term bonds (OK, PS) and PLN4-8bn in longer-term bonds (DS, WS, WZ and IZ) in a total of six bond auctions. Three switch auctions are scheduled for Q1, but will depend on market conditions, as was the case last year. Planned gross issuance of T-bills is PLN12-18bn, similar to that in Q109. However, if the state budget’s liquidity remains favourable, it is possible there will be a further reduction in T-bill auctions.
On the external debt front, the MoF announced this week that Poland will sell a Eurobond (at least EUR1bn) with maturities of more than 10y. With the improved general government deficit and the relatively supportive global backdrop, this external debt is likely to receive good demand. Note that investors’ appetite for EM bonds is also evident in the strong demand for the
USD2bn TURKEY6.75 5/40 dollar bond sale, with the total demand at $7.3bn
Table 1. Issuance plan of Polish government debt for January
Date Security Planned offer (PLN bn)
6-Jan-09 Switch Auction
PS0415,WZ0118
11-Jan-09 52 week T-Bill 0.5-1.0
13-Jan-09 OK0712 3.0-5.0
18-Jan-09 52 week T-Bill 0.5-1.0
20-Jan-09 DS/WS Bond 1.0-2.0
25-Jan-09 52 week T-Bill 1.0-1.5 Source: SG Cross Asset Research, the Ministry of Finance
On the demand side, the largest pick-up in holdings of local Polish government debt has come from banks according to the latest data (end November 2009). The inflow from foreign investors to the Polish domestic debt market also increased. This pick-up in holdings is hardly surprising given the improvement in risk appetite and Poland’s comparatively favourable macro backdrop vs its CEEMEA peers, and we expect this trend to continue. In terms of tenors, the demand for shorter-dated bonds has been stronger than that for longer-dated, as is evident in the bid cover ratio (see table below). The weaker demand for long-end bonds could be due to concern over the worsening budget deficit.
As mentioned earlier, on an intra-region basis we favour Poland over its CEEMEA peers from a fundamental perspective (see Fixed Income Outlook). Along the local curve, we prefer the intermediate segment to the shorter end of the curve, as it offers some duration and is less affected by monetary policy bias. As a differentiation trade, we recommend receiving Poland 5y IRS vs paying 5y RUB CCS. We suggest entering the RUB leg towards the first half of March as we expect inflation to rebound and see limited room for RUB appreciation into H1 2010 (see Emerging Weekly, 11 December 2009).
Table 2. Bid cover ratio of latest Treasury security auctions
Security type and Maturity Last B/C
Avg. B/C of past 5 auctions
T-Bill 52 wk T-Bill 4.1 (26.10.09)
3.6
Short-end bonds
OK0712
PS0415
3.8
1.6 (02.12.09)
2.0
2.0
Long-end bonds
DS1019, WS0922 and WS0429
2.0 WS0922
(23.09.09)
2.3*
Source: SG Cross Asset Research, the Ministry of Finance, *out of all long-term bond auctions
Czech Republic – wait to position for a receiver
In Q1 2010, the Finance Ministry plans to sell CZK42bn worth of CZGBs in the domestic market, but with no CZGB
Emerging Markets Weekly
08 January 2010 16
maturing. This is similar to what was auctioned in Q1 in past years (see Graph 1). For example, in Q109 the Finance Ministry sold CZK46.8bn to the primary market in auctions and an additional CZK17.7bn from its portfolio on the second market. But while in Q109 almost CZK20bn worth of FRNs were sold, this year no FRN is planned for Q1. Only fixed coupon CZGB are in the calendar, i.e. CZK8bn of 3Y CZGB, CZK15bn of 5Y CZGB, CZK13bn of 10Y CZGB and CZK6bn of 15Y CZGB.
Graph 1. CZGB issuance on primary market in CZK bn
0
20
40
60
80
100
120
2010
4Q
2009
4Q
2008
4Q
2007
4Q
2006
4Q
2005
4Q
2004
4Q
2003
4Q
issued foreign CZGB
issued domestic CZGB
Source: MoF, Economic & Strategy Research, Komercni banka
Market-wise, asset swap spreads (ASW) have come down notably in the past few months. CZGB with maturity up to 5Y are now trading at a negative ASW. This reduces the attractiveness of CZGB investments, especially for Czech banks and foreign investors, which absorbed the bulk of CZGB issuance in 2009. Demand from local insurance companies and pension funds, the third biggest CZGB investor, also started to slow down.
While we think CZGB supply in Q1 is unlikely to drive ASW higher in the near term, we detect factors which could limit demand for CZGB in Q110. As a result, we think that ASW spreads should be close to bottom and are at risk in the case of a return of risk aversion.
From a strategic standpoint, the recent back-up in CZK local rates has made the short-end an attractive candidate to receive (see Graph 2), especially given the amount of hikes priced in for the next 12 months (around 75bp). That said, we recommend waiting for a better time before establishing an outright receiver position in the short-end of the curve. Near-term, we prefer an entering 2s5s steepener or a paying 2s5s10s barbell to an outright position. A 2s5s10s barbell (i.e. pay 5s vs receive 2s and 10s) makes sense as we see value in the short-end current levels, while paying 5s offers a hedge to an increase in yields.
Graph 2. CZK 2y IRS
2.02.12.22.32.42.52.62.72.82.9
Dec 08 Apr 09 Aug 09 Dec 09
CKSW2 Index
%
Source: SG Cross Asset Research, Bloomberg
Hungary – financing still covered by IMF/EU funds
During Q1 2010, the AKK is scheduled to issue a total of HUF1133bn T-Bills and government bonds (of which HUF313bn is bonds), compared with total redemptions of HUF905.8bn. This is significantly more than in Q1 2009 due to the absence of any regular government bond auctions during Q1 last year.
The AKK 2010 gross issuance is projected at HUF6,664bn, of which HUF5859bn is in local currency. This estimate is 1186bn lower than the planned requirement for 2009, mainly due to the loans from the IMF/EU (a total of EUR20bn) which have been extended to 2010. This means that financing needs are fully covered for most of 2010 and that the AKK can afford a very light and flexible issuance calendar.
Although non-resident holdings of local debt are yet to show signs of a significant pick-up from the demand side, supply considerations are very supportive for local government bonds in H1 2010. This, together with improved risk appetite, justifies lower bond yield and tighter ASW, assuming the risk appetite continues to hold. Comments by Moody’s about a potential withdrawal of the negative outlook on Hungary’s ratings (currently Baa1/BBB-/BBB+) on 7 January also supports our bullish view on Hungary bonds in Q1 2010. That said, the upcoming parliamentary election this spring (around April/May) presents some implementation risks for fiscal policy. Therefore, a change in the ratings outlook is unlikely to materialise before the election. We maintain our long 13/D position with a target of 6.70% and see any sell-off above 7.10% as an opportunity to increase the position. Curve-wise, there is potential for the local curve to steepen further - unlike in other CEE countries - as easing bias remains intact. We see the base rate bottoming at 5% by H2 2010 (from 6.5% now), which is not fully priced into the short-end.
Emerging Markets Weekly
08 January 2010 17
Security type and Maturity Last B/C Avg. B/C of
past 5 auctions
3m 4.6 (05.01.10)
3.2 T-Bill
12m 1.8 (23.12.09)
2.5
3y 1.3 (30.12.09)
2.5 Short-end bonds
5y 2.3 (30.12.09)
2.2
Long-end bonds
10y 2.7 (30.12.09)
2.7
Turkey – lower planned roll-over ratio than 2009 but
the IMF loan agreement remains key
In Q1 the Treasury plans to borrow a total of TRY54.5bn with TRY19.5bn, TRY21bn and TRY14bn in January, February and March respectively (the planned borrowing for 2010 totals TRY195.3bn). This compares to only TRY27.2bn in Q1 2009. Note that the Treasury will be issuing a new 10-year local fixed-rate bond in January.
Planned bond issuance in Q1 will fully cover redemptions to the market. For January, the planned market roll-over ratio is 100%, which is lower than the realised roll-over ratio of 108% in 2009 (see Graph 3).
Following the successful sale of the USD2bn 30y Eurobond, no external borrowing is planned for February and March. The strong demand for the USD2bn could be partly spurred by expectations of an IMF loan agreement. Prime Minister Tayyip Erdogan’s recent comments suggest a deal is close.
From a strategic perspective, the IMF loan will remain key. Not only will it cover Turkey’s financing needs, it also increases Turkey’s creditability. This reinforces our preference for Turkish bonds over South African bonds from an inter-region perspective (see FI Outlook 2010). The upgrade of Turkey’s ratings by Moody’s to Ba2 to Ba3 on 8 January also supports this view.
Graph 3. Steady planned market rollover for Q1
0.50.60.70.80.91.01.11.21.31.41.51.6
Jan09
Feb09
M ar09
Apr09
M ay09
Jun09
Jul09
Aug09
Sep09
Oct09
Nov09
Dec09
Jan10
Feb10
M ar10
Planned market roll overActual market roll overAverage realised YTD
Source: SG Cross Asset Research, Turkish Treasury
Along the local curve, we expect the Central Bank of Turkey to keep rates on hold until Q4 2010. This will limit the downside potential for short-end local rates. That said, the carry of receiving in the short-end, such as 2y or 1y1y forward, is very attractive - estimated at +22bp per month. Moreover, a strong Lira as we forecast should also be positive for local rates. Curve-wise, we see potential for the long-end to outperform, especially if risk appetite continues to hold. This should put a bull flattening bias on the local curve.
South Africa – supply pressure to remain but value in short-end receiver
We expect the deteriorating budget deficit and consequent issuance concerns to continue to weigh on local bonds. The Treasury reported a November monthly deficit of ZAR23.5bn vs ZAR10.6bn last year. This makes the FY YTD deficit already 83% of the MTBS full-year plan of ZAR183.8bn (7.6% GDP). The huge revision in the borrowing requirement (see Table 3) also suggests higher issuance during the rest of this FY.
The supply pressure is already evident in the increase in the weekly supply of government bonds last year to ZAR2.1bn and the increase in the supply of T-Bills to the market by ZAR250m at the end of December.
As noted in our trip note on 24 November, we expect the current issuance pattern to stay the same for the rest of this FY. Issuance will continue to focus on local debt as the financing needs are in ZAR and no external debt is planned until next FY. Given this supply outlook, we have a cautious stance on South Africa’s debt into H1 2010. However, we still see value in the short-end receiver which should benefit from the good carry (around 7bp per month) and the easing bias of the SARB. We like receiving ZAR 1y1y forward to express our different monetary policy cycle theme between CEEMEA and Asia/LatAM. Korea and Brazil are seen as taking the lead in hiking rates. Curve-wise, further easing bias, as in Hungary, is likely to maintain steepening pressure on the local curve. Table 3. FY 2009/2010 Net borrowing
ZAR bn Originally Budgeted Revised
Actual Apr-
Sep 09
Actual Apr-Sep
08
% FY H109
vs. full year
Total net borrowing requirement
94.8 175.8 93.9 14.9 53%
Domestic short-term loans (net)
15.4 49.7 43.3 8.5 87%
Domestic long-term loans (net)*
63.7 115.8 35.4 13.6 31%
Emerging Markets Weekly
08 January 2010 18
Latest bid-cover trend in South African Treasury securities
Security type and Maturity
Last B/C
Avg. B/C of past 5
auctions
3m 1.4 (31.12.09)
1.6 T-Bill
12m 3.4 (31.12.09)
4.3
R206 2.6 (24.11.09)
2.7 Short-end bonds
R203 4.4 (01.12.09)
2.3
Long-end bonds
R186
R209
3.2 (20.10.09)
4.66 (15.12.09)
2.6
2.1
Israel - redemptions in 2010 are concentrated in H1
As discussed in the issuance outlook in previous Emerging Weekly, gross domestic issuance is expected to remain quite stable at ILS90.5bn for 2010 compared with ILS91.6bn in 2009. Redemptions for 2010 are also expected to be similar to those in 2009 at ILS69bn. Therefore, we do not anticipate any substantial pressure on the government market on the supply front. That said, prospects of lower budget deficit on stronger growth could be supportive for local debt.
Excluding non-competitive auctions, the MOF plans to issue ILS4bn in January and ILS3.5bn (excluding ILTBIL issuance) in February.
Redemptions in Q1 2010 amount to ILS19bn. The bulk of redemptions are in the first half of the year, with the biggest month being June (see Graph 4).
Graph 4. Redemptions in 2010 are concentrated in H1
02468
101214161820
Jan10
Feb10
Mar10
Apr10
May10
Jun10
Jul10
Aug10
Sep10
Oct10
Nov10
Dec10
ILS Bn
Source: SG Cross Asset Research, MoF
On the demand side, non-resident purchases of local bonds have been falling since September last year. Prospects of further rate hikes and expectations of FX
intervention to slow ILS appreciation could create some headwind for the demand for local bonds.
Strategy-wise, we expect the Bank of Israel to continue its tightening cycle until Q3 2010 with the base rate peaking at 2.50% from 1.25% now. These hikes are already priced into the FRA curve, which may limit further upside for short-end rates. Curve-wise, we expect further flattening bias on the local curve, especially with the longer end of the swap curve moving more in tandem with the US swap curve.
Graph 5. Falling non-resident holdings of local bonds
-400
-200
0
200
400
600
800
1,000
Jan09
Feb09
Mar09
Apr09
May09
Jun09
Jul09
Aug09
Sep09
Oct09
Net transactions, $ Mn
Source: SG Cross Asset Research, MoF
Emerging Markets Weekly
08 January 2010 19
Issuance Calendar Date Issuer Bond Planned Amount (Bn local ccy)* Bid-Cover
28-Dec-0929-Dec-0930-Dec-09 Hungary 2013/E 7.50% 20.00 1.27
2015/A 8.00% 20.00 2.322019/A 6.50% 10.00 2.69
31-Dec-09 South Africa T-Bill 1Y 0.35 3.43 T-Bill 9M 0.75 2.47 T-Bill 6M 0.95 2.14 T-Bill 3M 3.70 1.42
04-Jan-10 Poland Treasury Bills Cancelled 05-Jan-10 Hungary 3m T-Bill D100414 50.00 4.6006-Jan-10 Poland Switch auction, bonds to be repurchased- PS0310, OK0710 & DS1110; sold- PS0415 & WZ011807-Jan-10 Hungary 12m T-Bill D101215 50.00 2.8208-Jan-10 South Africa T-Bill 1Y 0.35
T-Bill 9M 0.75 T-Bill 6M 0.95 T-Bill 3M 3.70
11-Jan-10 Poland 52 week T-Bill 0.50-1.00Turkey 6M T-BillIsrael ILGOV 4.5% 01/2015 0.25
ILGOV 5% 01/2020 0.50ILCPI 1.5% 06/2014 0.25
ILFRN 5/2020 0.25ILTBIL0 08/2010 0.25
South Africa R197 Inflation-linked bond Total I/L offer: 0.6bnR202 Inflation-linked bondR210 Inflation-linked bond
12-Jan-10 Hungary 3M T-Bill D100421 40.00Turkey 3y Fixed coupon bond
7y FloaterSouth Africa R208 1.00
R204 1.1013-Jan-10 Poland OK0712 3.00-5.00
Hungary Buyback auctionCzech T-Bond 2009-2019, 5.00% 7.00
14-Jan-10 Czech T-BILL 579 6.00Hungary 2013/E 7.50% 25.00
2015/A 8.00% 15.002019/A 6.50% 10.00
15-Jan-1018-Jan-10 Poland 52 week T-Bill 0.50-1.00
Turkey 15m zero couponIsrael ILGOV 4% 03/2012 0.25
ILGOV 4.5% 01/2015 0.25ILGOV 5% 01/2020 0.25ILCPI 3% 10/2019 0.25
ILFRN 5/2020 0.2519-Jan-10 Hungary 3m T-Bill D 100428
Turkey 2y Fixed coupon bondTurkey 22m zero coupon bond
South Africa Domestic government bonds20-Jan-10 Poland Long-term bonds DS/WS 1.00-2.5021-Jan-10 Hungary 12m T-Bill D 10121522-Jan-1025-Jan-10 Poland 52 week T-Bill 1.00-1.50
Israel ILGOV 4% 03/2012 0.25ILCPI 1.5% 06/2014 0.25ILCPI 3% 10/2019 0.25
ILFRN 5/2020 0.25ILTBIL0 08/2010 0.25
26-Jan-10 Hungary 3m T-Bill D 100505Turkey 10y fixed coupon bond
South Africa Domestic government bonds27-Jan-10 Czech 3y Floater 8.00
Hungary Buyback auction28-Jan-10 Hungary Domestic government bonds29-Jan-10
Source: SG Cross Asset Research, Ministry of Finance, Reuters, Bloomberg*Past auctions show amount sold, Czech Republic,Israel Bid-Cover ratio is calculated from the competitive auction
Emerging Markets Weekly
08 January 2010 20
Rates Quantsight
PCA results across EM curves
PLN HUF CZK ZAR MXN10Y 5.78% (0.0bp) 7.03% (-15.5bp) 3.61% (+8.0bp) 8.81% (-1.0bp) 8.35% (+3.0bp)10Y-2Y 71.0bp (0.0bp) 40.0bp (+0.2bp) 128.0bp (-1.0bp) 122.0bp (+2.0bp) 207.8bp (+1.0bp)Level indicator 99.8% (+0.6%) 12.8% (-4.6%) 53.2% (+9.0%) 10.5% (+1.3%) 39.3% (+2.1%)Slope indicator 59.7% (+3.7%) 92.5% (-6.4%) 89.6% (-7.6%) 85.0% (+6.5%) 64.6% (+1.9%)Convexity indicator 40.7% (-0.9%) 35.2% (+6.5%) 46.1% (-1.8%) 19.7% (+7.1%) 42.0% (+0.4%)Level explanatory power 98.1% 99.6% 93.8% 87.1% 81.5%Slope explanatory power 1.5% 0.3% 5.3% 12.2% 15.2%Convexity explanatory power 0.3% 0.0% 0.7% 0.6% 2.2%Top driver 10Y 10Y 10Y 2Y 5Y
Best flattener 5Y-7Y 7Y-10Y 5Y-10Y 2Y-5Y 2Y-5YInd. mid / spread to model 5.0bp (+0.7bp) -5.0bp (+1.7bp) 53.0bp (+1.5bp) 83.0bp (+0.5bp) 129.0bp (+1.4bp)z-score 0.59 0.66 1.45 0.54 0.27Total carry and roll-down (3M) -3.8bp -1.5bp -0.8bp 17.8bp -3.9bp
Best steepeners 2Y-10Y 2Y-7Y 2Y-5Y 5Y-7Y 5Y-10YInd. mid / spread to model 71.0bp (-1.8bp) 45.0bp (-1.7bp) 75.0bp (-0.2bp) 17.0bp (-0.9bp) 78.8bp (-2.3bp)z-score -1.40 -1.05 -0.24 -0.54 -0.66Total carry and roll-down (3M) 15.8bp 14.2bp 6.9bp -0.4bp 6.6bp
Best barbell payer (*) 2Y-5Y-8Y 5Y-7Y-10Y 3Y-5Y-7Y 5Y-7Y-10Y 5Y-7Y-10YInd. mid / spread to model 64.0bp (-1.7bp) 5.5bp (-3.6bp) 14.0bp (-4.6bp) 14.5bp (-1.8bp) 0.8bp (-2.4bp)z-score -0.88 -0.90 -1.49 -0.56 -0.23Total carry and roll-down (3M) 5.3bp 2.3bp 5.0bp -1.1bp 1.9bpCorrelation with levels 87% 74% 11% 48% -41%Correlation with slope 23% -9% 92% 59% 43%Correlation with convexity -43% -1% -30% -3% 57%
Best barbell rec (*) 5Y-7Y-10Y 3Y-5Y-7Y 5Y-7Y-10Y 2Y-5Y-8Y 3Y-5Y-7YInd. mid / spread to model 8.0bp (+2.4bp) 19.5bp (+1.5bp) -9.0bp (+0.8bp) 63.0bp (+1.6bp) 36.5bp (+5.3bp)z-score 0.97 0.37 0.29 0.87 0.71Total carry and roll-down (3M) -1.8bp -2.1bp -0.3bp 17.5bp 1.5bpCorrelation with levels 61% -12% 18% 50% -53%Correlation with slope 27% 65% 92% 82% 54%Correlation with convexity -20% -66% -35% -2% 41%
* using standard 50-50 barbell weights
Cu
rve
ind
icat
ors
Bes
t sl
op
e tr
ades
Bes
t b
arb
ells
Source: SG Cross Asset Research
Emerging Markets Weekly
08 January 2010 21
Economic Data Preview
Czech CPI (Previous: 0.5% yoy; KB Forecast: 0.9% yoy) Inflation is moving up on base effect
Czech consumer prices should increase 0.1% mom in December. Regulated prices should not change much in December (we expect +0.0% mom). Growth should be recorded in food prices (+1.0% mom). On the other hand, fuel prices should decrease (-0.4%), as well as adjusted inflation (-0.1% mom). Weak demand still pushes adjusted inflation downward. The pro-inflationary lagged effect of a weaker crown is dampened significantly in the environment of weak demand. In a year-on-year comparison, inflation should move from +0.5% yoy in November to +0.9% in December. Adjusted inflation should decrease marginally from 0.0% to -0.1% yoy.
-2.0%
-1.0%
0.0%
1.0%
2.0%3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Jan.07 Jan.08 Jan.09 Jan.10 Jan.11
CPI Inflation (y/y)Monetary policy inflation (y/y)Inflation target
Source: KB, CSO
Czech Unemployment (Previous: 8.6%; KB Forecast: 9.3%)
Unemployment is still increasing
The labour market is still suffering from the economic recession although the most significant worsening is probably over. As unemployment lags real activity, the unemployment rate should continue to rise in the months ahead. We expect it to increase from 8.6% to 9.3% in December as fixed-term contracts and some seasonal work usually terminate in December. The seasonally-adjusted unemployment rate should rise more modestly, from 9.0% to 9.1%.
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
Jan.04 Jan.05 Jan.06 Jan.07 Jan.08 Jan.09 Jan.10 Jan.11
Unemployment (seasonally adjusted)
Source: KB, MoSA
Czech Retail Sales (Previous: -4.7% yoy; KB Forecast: +1.9%)
Retail sales are weak due to negative labour market developments
Czech retail sales should stagnate mom in November (seasonally and working-day adjusted). Sales in the automotive sector should increase 1.2% mom (WDA, SA), according to our estimate which is based on new car registrations. Sales excluding the automotive sector (-0.5% mom WDA, SA) should be supported by improving consumer confidence and also by relatively high wage growth. On the other hand, retail sales will still be negatively influenced by rising unemployment. In a year-on-year comparison, we expect an increase in retail sales of 1.9% in November (-1.0% yoy after working days adjustment).
-7%
-3%
1%
5%
9%
13%
Jan.01 Jan.03 Jan.05 Jan.07 Jan.0970
75
80
85
90
95
100
105
110Retail sales ex cars (y/y, wda)Consumer confidence (CSO)
Source: KB, CSO
Emerging Markets Weekly
08 January 2010 22
Czech PPI (Previous: -2.4% yoy; KB Forecast: -1.0% yoy) Producer prices are pushed up by commodity price increases
Czech producer prices should decrease 0.1% mom in December, due to seasonality. While the food industry should continue to push producer prices down, oil prices and metal prices now have the opposite effect. In a yoy comparison, the decline in producer prices should decelerate from -2.4% yoy in November to -1.0% yoy in December.
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Jan.00 Jan.02 Jan.04 Jan.06 Jan.08 Jan.10-19%
-13%
-7%
-1%
5%
11%
PPI y/y eur/czk y/y (+14M)
Source: KB, CSO
Czech CA (Previous: 12.4bn CZK; KB Forecast: -6.6bn)
The current account of the balance of payments should reach a deficit of CZK6.6bn in November after a surplus of CZK12.4bn recorded in October. Due to the positive surprise on foreign trade in November - it was higher by CZK3.5bn - there is upside risk to our estimate on the current account. All in all, the current account performed well last year thanks to the excellent foreign trade result and a lower deficit in the income balance. Both these results were due to low economic activity. The current account should be below -1.0% GDP in 2009, a very good performance.
-200
-150
-100
-50
0
50
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Current Account (CZKbn) 12M cumulative
Source: KB, CNB
Emerging Markets Weekly
08 January 2010 23
EM cross asset performance and SG sentiment indicator
SG Sentiment indicator* EM FX performance (long EM FX 180d return %)
0
0.2
0.4
0.6
0.8
1
Jan-09 M ar-09 M ay-09 Jul-09 Sep-09 Nov-09 Jan-10
SG S
entim
ent I
ndic
ator
Risk seeking
Risk averse
0
5
10
15
20
25
30
35
RO
N
ILS
CZK PL
N
CN
Y
HU
F
RU
B
TRY
MXN
KRW
ZAR
BRL
Source: SG Cross Asset Research, Bloomberg. *see FX QuantSight Source: SG Cross Asset Research, Bloomberg
EM rates performance (2Y IRS bp change YTD) EM Equities performance (% change YTD)
-2000 -1500 -1000 -500 0 500
RUB*TRY*BRL^MXNHUFZARCZKPLN
KRWILS
CNYRON
020406080
100120140
USD
ZAR
CZK PL
N
MXN
KRW
RO
N
CN
YH
UF
KZT
ILS
BRL
UAH TR
YR
UB
EM equities Chg (%) since 01 Jan 09MSCI EM
Source: SG Cross Asset Research, Bloomberg, ^Jan 11 DI * XCCY Source: SG Cross Asset Research, Bloomberg
EM 3M FX implied volatility (% change YTD) EM CDS performance (% change YTD)
-100
-80
-60
-40
-20
0
CN
Y
KRW
RO
N
MXN PL
N
BRL
EUR
ILS
RU
B
TRY
CZK HU
F
ZAR
0
5
10
15
20
EMFX 3m implied vol Chg (%) since 01 Jan 09 (LHS)Last price (RHS)
-100
-80
-60
-40
-20
0
RU
BKR
WKZ
TU
AHC
NY
ZAR
RO
NBR
LM
XNTR
YPL
NC
ZK HU
FIL
S
0
200
400
600
800
1000
1200
CDS Chg (%) since 01 Jan 09 (LHS) Last price (RHS)
Source: SG Cross Asset Research, Bloomberg Source: SG Cross Asset Research, Bloomberg
Emerging Markets Weekly
08 January 2010 24
EM FX forecasts
Mar 10 Jun 10 Sep 10 Dec 10
EUR/PLN 4.00 3.80 3.70 3.70
EUR/HUF 260 255 250 250
EUR/CZK 25.00 25.20 24.80 24.50
EUR/RON 4.20 4.10 4.00 4.00
EUR/RUB 43.50 43.80 44.00 43.50
EUR/TRY 2.20 2.10 2.00 1.95
USD/RUB 28.20 27.80 28.50 29.50
USD/TRY 1.40 1.35 1.35 1.40
USD/ZAR 7.80 7.80 8.00 8.20
USD/ILS 3.60 3.40 3.50 3.50
USD/BRL 1.75 1.80 1.95 1.90
USD/MXN 12.70 12.60 12.70 12.80
USD/CLP 480 480 500 520
USD/ARS 3.80 3.80 3.83 3.85
USD/COP 1950 2000 2000 2000
USD/CNY 6.75 6.70 6.65 6.60
USD/HKD 7.80 7.80 7.80 7.80
USD/INR 45.50 44.75 45.25 45.00
USD/IDR 9400 9250 9200 9200
USD/MYR 3.35 3.30 3.27 3.23
USD/PHP 46.50 46.00 45.50 45.25
USD/SGD 1.36 1.35 1.33 1.31
USD/KRW 1125 1075 1060 1045
USD/TWD 31.25 31.00 30.75 30.50
USD/THB 32.75 32.50 32.25 32.25
EMU Monitor HICP
Inflation*Long-term GB yield*
General Government
Balance,last Q4 avg
General Government
Debt
ERM II entry
LowerRate
UpperRate
Maximum upward
deviation**
Maximum downward deviation**
period 11.2009 11.2009 06.2009 06.2009
Reference Value 1.7 6.1 -3.0 60
Czech Republic 0.8 4.9 -3.9 34 No
Hungary 3.9 9.2 -4.3 77 No
Poland 3.9 6.1 -5.4 49 No
Romania 5.7 9.7 -7.8 17 No
Bulgaria 2.9 7.3 -2.9 14 No
Estonia 1.0 NA -6.3 6 Jun.04 13.300 15.647 17.994 0.0% 0.0%
Latvia 4.2 12.0 -8.2 24 May.05 0.597 0.703 0.808 1.0% -0.9%
Lithuania 4.8 14.0 -7.4 22 Jun.04 2.935 3.453 3.971 0.0% 0.0%
* 12-month average rate
CentralRate
Note: Red cell means not fulfilling the criteria
** Maximum percentage deviations from ERM II central rate over last two years, based on a ten-day moving average of daily data at business frequency. An upward/downward deviation implies that the currency is on the weak/strong side of the band.
Emerging Markets Weekly
08 January 2010 25
Interest rates forecasts
Mar 10 Jun 10 Sep 10 Dec 10
Poland 3.50 3.50 3.50 3.50
Hungary 6.00 5.00 5.00 5.00
Czech Rep. 1.00 1.00 1.25 1.50
Romania 7.50 6.50 6.50 6.50
Russia 8.50 8.50 8.50 8.50
Turkey 6.50 6.50 6.50 7.00
South Africa 6.50 6.50 6.50 6.50
Israel 1.75 2.25 2.50 2.50
Brazil 8.75 9.00 9.50 10.25
Mexico 4.50 4.50 5.00 5.75
Chile 0.50 0.75 1.00 1.75
Colombia 3.50 3.75 4.50 5.25
China 5.31 5.31 5.31 5.31
Indonesia 6.50 6.75 7.00 7.25
Malaysia 2.00 2.00 2.00 2.00
Philippines 4.00 4.00 4.00 4.00
South Korea 2.50 2.75 3.00 3.25
Taiwan 1.25 1.50 1.75 2.00
India 5.00 5.25 5.50 5.75
Thailand 1.25 1.50 1.75 2.00
Macro forecasts
2007 2008 2009 2010 2007 2008 2009 2010
Poland 6.7 4.9 1.5 2.0 2.5 4.2 3.4 2.5Czech Republic 6.1 2.3 -4.0 1.5 2.9 6.3 1.0 1.1Hungary 1.1 0.6 -6.7 -1.0 8.0 6.2 4.5 4.0Russia 8.1 5.7 -9.7 3.5 9.0 14.1 11.5 10.0
GDP Inflation (year average)
2007 2008 2009 2010 2007 2008 2009 2010
Poland -3.5 -5.0 -1.0 -2.0 -1.9 -3.6 -5.8 -6.5Czech Republic -3.2 -3.1 -0.6 -1.1 -0.7 -2.1 -5.7 -5.5Hungary -6.2 -8.4 -3.0 -3.0 -5.0 -3.8 -4.0 -3.8Russia 6.1 4.3 2.5 1.5 6.1 3.1 -8.5 -6.0
Current account balance (% of GDP) Fiscal balance (% of GDP)
Emerging Markets Weekly
CROSS ASSET RESEARCH – FIXED INCOME & FOREX GROUPS
Global Head of Research Head of Macro Strategy Head of Fixed Income & Forex Strategy Patrick Legland Benoît Hubaud Vincent Chaigneau (33) 1 42 13 97 79 (44) 20 7676 7168 (44) 20 7676 7707
[email protected] [email protected] [email protected]
Fixed Income
Ciaran O'Hagan Adam Kurpiel Aro Razafindrakola Jose Sarafana 33) 1 42 13 58 60 (33) 1 42 13 63 42 (33) 1 42 13 64 93 (33) 1 42 13 56 59
Guillaume Baron Patrick Gouraud David Mendez-Vives Christian Carillo (Asia-Pacific) (33) 1 42 13 57 07 (44) 20 7676 7850 (33) 1 42 13 31 03 81 3 5549 5626
Foreign Exchange
Carole Laulhere Phyllis Papadavid Peter Frank David Deddouche (33) 1 42 13 71 45 (44) 20 7676 7999 (44) 20 7676 7458 (33) 1 42 13 56 22
Patrick Bennett (HK) Greg Anderson, CFA Olivier Korber (852) 21 66 54 39 (1) 212 278 5715 (33) 1 42 13 32 88
Emerging markets
Murat Toprak Gaëlle Blanchard Esther Law (44) 20 7676 7491 (44) 20 7676 7439 (44) 20 7676 7396
Technical analysis
Hugues Naka Fabien Manac’h Stéphane Billioud (33) 1 42 13 51 10 (33) 1 42 13 88 35 (33) 1 42 13 35 55
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