Higher core CPI in Turkey should prolong the CBT’s hawkishness, helping the curve to flatten. Wereceive5yr USD/TRY swap and seethe window to receive the front end postponed to year-end. Our analysis also shows that positioning in TURKGBs is not concerning.
With lower headline inflation but much higher core inflation, our economist expects the CBT to stay on the hawkish side and keep the blended funding rate close to the late liquidity window until year-end. This should prolong the CBT’s hawkishness, helping the curve to flatten. We receive 5yr USD/TRY swap and see the window to receive the front end postponed to year-end. TURKGBs have received US$5.8 billion of inflows YTD. We estimate that US$3.8 billion comes from GBI-EM investors covering their UW positions. Non-ETF and ETF investors could have bought US$1 billion and US$370 million each on the back of strong inflows. This leaves US$745 million of inflows from other investors, which is around 0.6% of the overall TURKGBs market. Using the same methodology, we estimate that non GBI investors have bought around 6% of the SAGBs market this year. Such a comparison suggests that positioning in TURKGBs is not concerning.
Despite the CNB hiking rates yesterday, we do not see much value in being short EUR/CZK and think the risk/reward is unattractive at current levels. However, we do see potential for some gradual CZK gains, given that the CNB appeared more comfortable with currency strength than previously.
In our view, ZAR should underperform and so we continue to recommend short positions. Our expectation for a further 50bp of rate cuts over the coming quarters along with a weak economic position and political uncertainty should continue to weigh on the rand. Moreover, with volatility in core bond markets and uncertainty about G3central bank monetary policy as they become more hawkish, ZAR will likely become increasingly vulnerable. Our pivot to a CNH/ZAR position reduces funding costs at the same time as offering attractive risk/reward. Fundamentally, we think CNH is strong, supported by domestic investment and still strong global trade. What’s more, China’s economic growth rate has been accelerating over recent quarters, with a tight monetary policy environment, and a substantial reduction in capital outflows. We target 2.10 in CNH/ZAR with a stop at 1.93.
A Reuters report indicated that the PBOC may consider widening the USD/CNY trading band to 3% around the daily fixing from 2% currently. While such a reform would be in line with China’s long-term market liberalisation goals, in the near term, CNY spot continues to track the RMB fixing closely amid tighter capital controls this year. China has widened the trading band gradually from 0.5% in 2007 to 1% in 2012 and then to 2% in March 2014. Interestingly,2007 and 2012 were both years of the Party Congress, where the band widening occurred before the Congress meeting. While such a reform would reinforce policy-makers’ focus on financial market liberalisation and increasing confidence in RMB, the market reaction, we think, would depend on the underlying economic fundamentals and USD. The previous two band widenings did see CNY spot weakening to the top of the trading band. However, we argue that China’s fundamentals and expectations on RMB have improved since 2012and 2014, when growth was on a weakening trend and RMB fixings were on a depreciation bias into the two band widenings.
EM-dedicated fund flows over the past week (up to August 2) totalled US$1.92bn of inflows,up from US$1.60bn in the previous week. This is in line with decent one-week returns for both hard currency (0.6%) and local currency (0.4%). Overall EM funds saw net inflows of US$1.48bn to non-ETFs, while ETFs managed inflows of US$454m. Inflows to hard currency funds increased to US$1.37bn (0.73% of AUM), of which ETFs saw inflows of only US$200m,as opposed to non-ETFs, which received inflows of US$1.17bn in the last week. Local currency funds saw inflows of US$612m (0.36% of AUM) in the last week, an increase of 50% over the previous week. Inflows to ETFs decreased marginally to US$254m, while non-ETFs saw inflows of more than four times (US$367m) the previous week. Split by geographical focus, global mandates saw inflows of US$407m while country or regional mandates saw net inflows of US$214m after two consecutive weeks of outflows. Lastly, blend currency funds saw outflows of US$55m (-0.10% of AUM) in the last week. Overall net inflow momentum to EM debt-dedicated funds has now lasted for 27 weeks and amounts to total inflows of US$44.2bn (or US$47.4bn YTD), making it the strongest sustained period of inflows out of the five inflow surges since the taper tantrum.