FxWirePro: Political and monetary buzz in BRICS FX - episode 1

BRL: In BRL, faster growth should strengthen portfolio inflows and reinforce a much improved current account. Elections will be an issue starting in 2Q’18, but the base case is a market-friendly outcome, one that will allow the passage of pension reform. Even though the high-yielding currencies have become consensus trades for 2018, we maintain a more bullish stance than consensus on BRL short term. The significant improvement in capital flows linked to the growth boost we expect in 2018 should support BRL. Buy 2Y 10D BRL calls/JPY puts.

RUB: On Friday, the CBR produced yet another surprise – and a major one for 2017 – by cutting the key rate by 50bp to 7.75%, i.e. -225bp from the December 2016 mark. This move is of interest to us not only in comparison with the consensus, as not a single economist predicted this magnitude of change but also in the context of the regulator’s reasoning. We see certain logical mismatches in the CBR rationale which, to us, complicates the understanding of the regulator’s mix between monetary and non-monetary risks to inflation as well as the assessment of their role over 1Q’18.

We like expressing leveraged bullish RUB views via EURRUB instead of USDRUB for three reasons:

a) The better insulation to higher Treasury yields / stronger dollar;

b) the dovish tinge to the October ECB may have trimmed upside risks to the Euro, and Italian elections next year could potentially even generate some alpha on short EUR crosses in 1H’18 by refocusing investor attention on European sovereign risks; and

c) The carry/vol ratios of EURRUB options significantly outstrip those in USDRUB.

INR: The INR recovered well from a sharp sell-off after PM Modi’s BJP won regional elections in the state of Gujarat, shaking off anti-incumbency headwinds after a 22-year rule. The political calculation now is that the BJP may be inclined to loosen the purse strings before Modi sets sight on re-election in 2019. This would give the economy, already forecast to be the best performer in 2018 in EM, another boost. This naturally begs the question of whether the central bank can afford a further loosening of monetary policy. The benchmark 10y yield rose 4.7bp yesterday to 7.18%, underperforming other counties like Brazil (+4bp) and South Africa (-21bp), and a reassessment of fiscal policy could cause the curve to steepen and thwart INR portfolio inflows.

In the Indian currency futures market, USDINR of the near month tenors (December delivery on the NSE) was at 64.11. While December contract OI increased 0.60 % from the previous day.

January contract USDINR ended at 64.33. OI increased 5.69 % in the previous session.

We expect the USD to meet supply pressure at higher levels. Hence, utilizing the upside in the pair to go short on the USDINR would be a wise idea.