Sunday, October 24, 2010

Strategy update and CIS update

Strategy update
On Monday, we established three new strategies (EMEA Strategy: New forecasts and a couple of trade ideas) and on Thursday we also sent out a TRY exposure hedging idea (EM Strategy: Opportunity for hedging TRY exposure). Following is an update on our strategies.

As our forecasts on the Turkish lira now show significant deviation from the indicative forward prices, we have decided to play the potential downside in lira to unfold against the Brazilian real, remaining net carry gainers. Since our short positioning, established at 1.1710, the relative valuation has favoured lira-longs with the current spot in TRY/BRL 1.1866 with the USD/TRY flows continuing to show appetite for risky currencies from which lira continues to enjoy.

Brazilian policy rate decision on Thursday has seen the SELIC target rate kept unchanged at 10.75%, with no rate change in view till next Spring and increasing signs of a rate hike to be delivered in H1 of 2011. The past week has also seen the Brazilian unemployment numbers falls further to a 6.2% from that of 6.7%, further emboldening our positive stance in BRL.

We continue to maintain a target for our strategy at 1.0460 and a stop loss level of 1.2455.

With Hungarian forint the second highest ranking currency of our weekly scorecard, our belief in HUF recovery potential is further solidified. The technical turn-around in HUF/PLN from the 1.4150 handle, which coincided with the 50 day moving average in the cross, has already seen the cross appreciate three days on a row with about 2% gains. While enjoying moderate carry income, we maintain our long position from 1.42,
targeting 1.53 and a stop loss at 1.35.

Receiving Polish 2yr IRS
Our forecast of unchanged Polish rates on the upcoming rate decision on 27th of October has allowed us to position for the short-end of the Polish curve to correct lower as we near the decision date. We are receiving fixed on the 2 year IRS at 4.77% and target about a 20bp drop to 4.58%.

The market pricing since the establishment of our strategy has favoured a moderation of yields on the short end with the 2 year swaps down 2bp at 4.75% at this writing.

CIS update
Short-term RUB weakness not a worry, overvaluation might be It is has not been a good week for the Russian rouble which remains under pressure despite other commodities are doing well and oil prices remain at a high level. In fact the rouble has seen the longest losing streak since August 2009 and dropped to the weakest level against the euro/dollar basket since December last year. The weakening of the rouble comes after the Russian central bank last week expanded the currency’s trading corridor to four to three roubles.

The weakening of the rouble is difficult to explain given the present global environment, which should be expected to be positive for a commodity currency and this in itself probably adds to investor nervousness. That said, we would argue that the weakness we are seeing the in rouble is probably temporary and if oil prices stay at the current level going forward then we would expect the rouble to start appreciate again soon.

Furthermore, we would also argue that the Russian central bank is moving toward a much more freely floating rouble and recently central bank deputy governor Alexei Ulyukayev has indicated that the central bank will allow for a complete free rouble from 2012. In the process of moving closer to a more freely floating rouble it is only natural that we are seeing more volatility in the rouble – both on the up and down sides.

Furthermore, the Russian central bank is probably not too unhappy to see a bit of more volatility to remind investors about the direction of the rouble is not just a one-way street and thereby avoiding a potential excessive strengthening in the same way as we have recently seen in other Emerging Markets currencies. Or said another way – some nearby volatility might be an effective way to keep Russia out of the global “currency war” and for now that seems much more effective than the kind of initiatives that the Brazilian
authorities have implemented, for example. We are not saying that the Russian central bank is intervening for sake of “spooking” investors, but the bank on the other hand probably doesn’t mind that investors are a little spooked at the moment.

Overall, we are hence not very worried about the recent softness in the rouble, which we mostly consider to be temporary and in general we believe that the ongoing recovery in the Russian economy and rising oil prices are supportive for the rouble. On the other hand we readily also acknowledge that the rouble hardly can be said to be cheap at a fundamental level. Hence, the rouble is now trading at stronger levels in real effective
terms than it was just prior to the collapse of Lehman Brother in 2008, which obviously gives some concerns about the longer-term prospects for rouble appreciation. Or said another way it is not short volatility, which should be a worry for investors, but rather longer-term valuation issues.

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