Opportunities in Asian rate spreads and curves – SocGen

Research Team at Societe Generale, suggests that upside to Asian rates will be amplified as there is likely to be a resurgence in correlations between Asian and USD rates upon heightened expectations for Fed tightening.

Key Quotes

“We look for opportunities in spreads and curves. There is a risk HKD-USD rate spreads, SGD-USD rate spreads and CNH CCS-CNY NDIRS spreads will re-widen, mainly triggered by FX sentiment. Most rate curves are flat for a reason, while there is potential for the CNY NDIRS curve to resteepen. On the basis/CCS market, the SGD basis curve is likely to normalise after issuer flows are absorbed, while the CNH CCS curve can become inverted again should RMB sentiment worsen. We also like being long 7Y MGS versus paying 7Y MYR NDIRS.

FX

The gradual weakness in EM currencies that started on April 20 has gained more traction following the surprising revelation in the FOMC minutes that a June hike is possible. With EM FX vulnerable in the current macro backdrop, we have added long dollar exposure in EMEA (ZAR) and Asia (PHP). We also recommend a tactical long MXN-RUB, predicated on the nearterm reversal in the stark year-to-date dissonance between MXN and RUB performance in response to oil prices.

Fixed income

In EMEA, we would not recommend chasing HUF rates higher at this point, with limited remaining upside in the run-up to the MNB meeting and asymmetric reaction in case of a rating upgrade. In Latam, the pre-DI curve will likely maintain steepening momentum in a strong dollar environment. Our long 7Y MGS position should be protected by the paying 7Y MYR NDIRS leg, with Asian rates broadly paid post-FOMC minutes and biased higher. In sovereign credit, we hold a relatively balanced portfolio in terms of risk exposure. Our main overweight names include Mexico, Peru and Serbia; our main underweight name is Turkey.”