Buy inflation break-evens in Chile and Mexico, BofA-Merrill says

There was money to be made by investors on inflation breakevens in Latin America and in Eastern Europe, Middle East and Africa, Bank of America-Merrill Lynch believed.

By stripping out the impact from Russia, Brazil and China from regional inflation aggregates - because their strong deflation and size were masking underlying trends - the broker found that inflation had been consistently surprising to the upside in LatAm.

Inflation in Asia on the other hand continued to surprise to the downside, although the negative gap in BofA-Merrill's inflation surprise indices had closed.

"In terms of our forecasts, we expect recovery in inflation in EEMEA and LatAm to sustain by end-2016, but we are less optimistic on Asia inflation outlook."

Among the GEM-10 economies, pipeline deflationary pressures, measured as the difference between headline producer and consumer price inflation, stood out in the case of Turkey, Russia and Asia, if Indonesia was excluded from the latter, the broker said.

"In LatAm [...] our modelling shows that roughly half of the break-even dynamics are driven by inflation expectations, with the rest explained by risk and liquidity."

BofA-Merrill analysts Claudio Piron and Adarsh Sinha recommended investors position by buying inflation break-evens in Chile and Mexico, where as in EEMEA it was Poland and South Africa which stood out in terms of potential reflation trades.

Over on the other side of the globe, in Asia, Indonesian bonds were the "most vulnerable" to inflation, they said, although there was still scope for the country's bonds to rally.

Singapore 2s10s 'steepeners' was a way to express the Asian reflation trade, the analysts added.

EM FX rally set to continue, UniCredit chimes in

Also on Thursday afternoon, UniCredit strategist Kiran Kowshik said he preferred focusing on South Africa's rand, the Russian ruble and Polish zloty in the CEEMEA space.

High-beta currencies such as Malaysia's ringgit, Indonesia's rupiah and the Chilean peso should also continue to fare well, he said.

The recent better tone in emerging market currencies had further to run thanks to the 'green shoots' visible in China, Kowshik said in a research note sent to clients.