Staying on China, we have taken profits on our recommendation nto receive 5y repo NDIRS asrepo rates have retraced significantly from highs with the 5y repo levels having fallen close to ourtarget of 3.9%. We look to receive again on upticks.
OPEC will conclude its meetings in Vienna today. We expect OPEC to agree to prolong its oilproduction cut by 9 months to the end of Q1 2018, though we note that this outcome is alreadylargely priced into crude prices, since most OPEC members have voiced support for an extension.
Asian markets are rallying this morning following the release of the FOMC meeting minutes withAsia FX stronger across the board by up to 0.9%. The minutes were consistent with our andconsensus views for a rate hike in June. While some comments were made on balance sheetreduction, we expect a more detailed plan on this process to arise at the Fed’s Septembermeeting.
In Asia, in China, a large gap that has recently developed between the daily CFETS fixing forUSDCNY and the official 4:30pm closing spot price. This suggests that the impact of daily spotclose on the fixing has diminished, which may indicate that Chinese authorities may want the RMBto appreciate more in line with their currency basket. If the PBoC is indeed willing to tolerate alarger gap between spot and fixing, or if the PBoC is sending an outright bullish signal on thecurrency, then we would expect short USDCNY NDF positions to outperform. As such, the team isrolling its short USDCNY position. We thus recommend selling 3m USDCNY NDF targeting 6.80,with stop loss at 7.00. For full details, please see CNY fixings: Sending a stronger message.
Finally, in Latam, trade data for Mexico will be released today. In Brazil, there were violentclashes yesterday and troops were deployed in Brasila. Focus remains on politics. Of note is thedecision on June 6 by the electoral court on whether to annul the previous election results due toalleged illegal financing.
In CEEMEA, the focus will be on the South African Reserve Bank’s (SARB) policy meeting wherewe expect the repo rate to be kept unchanged at 7.00%. Yesterday, headline inflation fell sharplyin line with our view to 5.3% y/y in April vs. 6.1% y/y in March. Today, the release of PPI datashould also show a decline on the back of weaker commodity prices. We think lower headline CPIwill prompt the SARB to revise its inflation forecast and turn more dovish in its rhetoric. Given thelack of receiving interest in South Africa, the curve is likely to steepen and drive fixed incomeflows to SAGBs. Yesterday, we saw a rally in the front-end of the curve and now, with 1y1y belowthe fixing, downward pressure on yields will move towards the belly of the curve where rates stillremain above the fixing e.g. 5y. Breakevens remain low in the back-end (10y BE are at 6.15) and,given fiscal uncertainty, we think 10y will lag the rally. We do not recommend chasing ZARstrength below 13. Instead, we would look to buy out-of-the-money calls below 13, should impliedvolatility inch down. We expect the central bank to cut rates by 25bp in Q4 2017, consistentmarket pricing for a 30bp cut in the next 6 months.