EM Macro and Strategy Focus

Deutsche Bank Markets Research Global Emerging Markets United States Economics Foreign Exchange Rates Credit Date 21 October 2016 EM Macro and Strategy Focus ________________________________________________________________________________________________________________ Deutsche Bank Securities Inc. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Taimur Baig, Ph.D Chief Economist - Asia (+65) 64238681 Gautam Kalani Strategist – EMEA +44(20)754-57066 Guilherme Marone Strategist - LatAm (+1) 212 250-8640 Elina Ribakova Chief Economist (+44) 20 7547-1340 Christian Wietoska Strategist – EMEA (+44) 20 754-52424 Sebastian Brown Strategist – LatAm (+1) 212 250-8191 Drausio GiacomelliStrategist(+1) 212 250-7355drausio.giacomelli@db.comEditors Drausio Giacomelli (+1) 212 250-7355 Jed Evans (+1) 212 250-8605 Guilherme MaroneStrategist(+1) 212 250-8640guilherme.marone@db.comEconomics Focus: In Asia, South Korea’s Q3 GDP, Singapore and Vietnam’sCPI inflation headline the data releases next week. In EMEA, South Africa’sfiscal consolidation is set to be upheld at next week’s budget announcement.In central bank meetings across Hungary, Israel and Russia, policy rates are allexpected to remain on hold. Turkey’s Quarterly inflation report will also bereleased next week where we expect only a slight upward revision in the 2017path. In LatAm, the Brazilian Congress could vote on the spending cap bill,while the BCB will publish the COPOM minutes. In Mexico, data releases onactivity, inflation, and unemployment are likely to dominate next week’sagenda: we expect them to reflect the Mexican economy’s combination ofdisappointing growth and slowly rising inflation, with low unemployment asthe only silver lining.Strategy Focus: Inflation risks and persistence are keeping central banks at bay. This, and receding vols support FX and some retracement in local fixed income. Stay neutral credit on supply and favor EUR paper.FX: We continue to remain selectively constructive on EM FX,acknowledging that EMFX is now at the top of its range vs. the EUR –although still in line with US equities. We see further room for RUBappreciation, (vs. USD and COP) and have also turned bullish on the randas the fundamental picture is at an in ection point and should mark thestart of the undervaluation correction. We also like short PLN vs. EUR andSEK. Keep low strike exposure in MXN, and topside exposure to CLP(through options), but close short EUR/PEN. Close long BRL/CLP and addon possible intervention / technical dislocations.Rates: Keep Jan19|Jan 20 FRA exposure in Brazil on favorable carry-valuation/risk trade-off under a possibly more gradual cycle. Keep long inPeru (Sob26s), steepeners in Colombia (IBR 5s vs. 26s) and bull-steepenersin TIIE (3M5s10s using receiver swaptions). An uneventful ECB andreceding core rates volatility supports retracement in EMEA, where we seemost value in the belly of the cash curve in Russia (unhedged), in the long-end in Hungary (hedged) and Poland (unhedged), and linkers in Turkey.Hold receivers in short-end of Turkey, the belly in South Africa and Russia(with steepening bias), and the long-end receivers in Israel.Credit: We remain strategic constructive EM credit, but tactically cautiouson supply and political/policy uncertainty. We expect the PDVSA swap to gothrough (albeit with a relatively low participation rate), leading to a reversalof recent drop in bonds prices. Favor Petrobras vs. Brazil (on fundamentalsand valuation) and Pemex vs. Mexico (on valuation). EUR denominatedbonds in Argentina are attractive after the recent dip.Best & Worst FX Performance: Best & Worst Rates Performance: Polish rates provide attractive entrance levels to roll down the curve (Page 7) 1.251.501.752.002.252.502.753.00Jan/15Feb/15Mar/15Apr/15May/15Jun/15Jul/15Aug/15Sep/15Oct/15Nov/15Dec/15Jan/16Feb/16Mar/16Apr/16May/16Jun/16Jul/16Aug/16Sep/16Oct/16official rates3m fixing2Y2Y IRS5Y IRS5Y bondsSource: Bloomberg Finance LP Source: Deutsche Bank Deutsche Bank, Bloomberg Finance LP Distributed on: 21/10/2016 17:57:29 GMTDistributed on: 23/10/2016 12:00:00 GMT 21 October 2016 EM Macro and Strategy Focus Page 2 Deutsche Bank Securities Inc. Top Trade Recommendations * IDStatusCountryTrade NameWeightsInitiationLast ActionLast ActionDateEntryCurrentTargetStop1MaintainHungaryLong EUR/HUFFXOutright08Sep16Initiation23Sep163053083113022MaintainPolandShort PLN/SEKFXOutright13Oct16Initiation2.262.232.202.293MaintainPolandLong EUR/PLNFXOutright27Sep16Initiation4.284.334.404.244MaintainRussiaShort USD/RUBFXOutright08Sep16Initiation64.7062.4963.0065.505NewSouth AfricaBuy a 1Y EUR/ZAR 14.5:13.5 put spread (spot ref: 15.65)Option Payoff14Oct16Initiation1.25%1.25%6MaintainRussia/ ColombiaLong RUB/COPFXOutright12May16Chg Target05Oct16