• FxWirePro: brics FX updates part 1 - key drivers of Ruble, renminbi and hedging portfolio

    Source: FxWire Pro - Central Bank / 07 Oct 2016 09:24:39   America/New_York


    Rouble remains our preferred carry currency in BRICS or EMEA EM. Rouble should find support from high nominal and real yields relative to peers, a hawkish central bank, and relatively large current account surplus compared to other high yielders (3% of GDP forecast for 2016).

    The CBR remains relatively hawkish. The central bank shifted its rhetoric more hawkish at its latest meeting on 29 July, expressing concerns over the stickiness of core inflation and inflation expectations.

    Contrary to expectations, the CBR did not signal a rate cut for September, and our economist now only expects a 50bp cut in December. With inflation and inflation expectations falling, it is still possible the central bank eases in September.

    Stabilizing oil prices should support the rouble. Our commodity analysts remain fundamentally bullish on oil over the medium horizon.

    Recent growth indicators suggest a sustained, albeit slow recovery. Manufacturing PMI has now rebounded back above 50 for August (50.8) from a 49.5 reading in July, projects GDP to grow 0.75%qoq SAAR in Q3, 1.3% QoQ SAAR in Q4 and 1.4% YoY growth in 2017 following -3.7% YoY recession in 2015.

    Long USDRUB 1w debit put spread (62.50, 59.50), spot ref: 62.09.


    We hold our 2016 year-end forecast of USDCNY at 6.85. The prospects of a Fed hike before year-end and a rise in capital outflows will drive further CNY depreciation.

    We also hold the bias that the PBoC would allow further weakness in CNY after the September G20 summit, as a policy reaction to the IMF’s suggestion to allow market forces to guide the exchange rate and move more towards a floating FX regime.

    In addition, as downside risks to growth increase in Q4, the motivation to ease financial conditions via lowering Renminbi’s trade weight index will become more compelling again, especially considering the CFETS TWI has been rangebound around 94 since July.

    USD/CNY rise in a year, an 8.4% rise in EUR/CNY and a 23% fall in CNY/JPY. Further depreciation is likely in the months to come, hence, it is already recommended to buy either 6M USDCNY forwards of January expiries or deploy debit call spreads eyeing on above mentioned forecasts of USDCNY.

    Those who are suspecting the following USD softness due to the recent Fed has changed the stance for hiking funds rate and to defer until beginning 2017, we understand that there is little-implied volatility in the OTM strikes which is why it is advisable to choose longs in 6M (1.5%) ITM strikes in the debit call spreads, while shorting 3M (1.5%) OTM strikes.

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