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In this edition, we emphasize the potential trading opportunities in a few EMFX baskets related to anomalies or dislocations. These include:
1) TWD too strong versus rate differentials, it is highly expensive versus rate differentials (6% overvalued using data since 2013); fair value around 33.30. Also, geopolitical risks are underpriced in our opinion.
2) CNH 1y implied vol rich compared to realized vols.
3) CNH trading at the premium to CNY, Zero cost/negligible premium options structure for trading and seagull for hedging as CNH IVs still appear exorbitant.
4) MXN and MYR cheap versus oil but RUB and BRL near fair value.
5) KRW and MXN risk reversals cheap versus implieds.
6) The positive carry from buying USDHKD forwards below the convertibility range, buying USD-HKD forward outright below the bottom of the convertibility range (7.75-7.85) is appealing if the position is held to maturity (basis risk could cause significant interim mark-to-market gains/losses).
7) There could be a potential breakdown in correlation between KRW and KOSPI due to growth in global equity basket but on the hedging grounds stay long in USDKRW via NDFs. We remain biased toward buying USDKRW but an upward move in global equities that pushes KOSPI higher is a serious risk to our thesis.
