Plunging USD yields offers respite to Asian FX; Upside to SGD rates forecast

Respite for Asia FX. SGD liquidity gets reshuffled.
Eugene Leow, Philip Wee27 May 2019
    Photo credit: AFP Photo

    FX: More respite on Monday

    Plunging US yields have eased some pressure on Asia’s beleaguered currencies. US 10Y bond yield fell to 2.32% for the first time since November 2017, reflecting mounting concerns about the outlook. Yet, it is too early to call for a reversal in the greenback’s uptrend, in our view. The largest component of the USD Index (DXY), the euro, will be weighed down by increased representation of the far-right parties at the European Parliament elections. The major gains made by the Brexit Party have increased doubts over whether Prime Minister Theresa May’s successor will have better luck in delivering Brexit. Odds remain for the DXY to end up consolidating into a 97.0-98.3 range.

    There is less fear that the Chinese yuan will depreciate past 7 against the USD, for now. China fixed the USDCNY central parity just below 6.90 through last week, and its officials warned of huge losses for those who sought to speculate against the Chinese yuan. A more stable yuan will be welcome by the export-led Emerging Asian countries. South Korea has warned markets of the won’s excessive depreciation. The won has become East Asia’s worst performer with a 6.1% depreciation so far this year. The Taiwan dollar was a distant second with a 2.5% depreciation.  In Southeast Asia, Indonesia affirmed its presence in the markets to stabilize the rupiah. USDIDR aborted its push to trade 14500 and has since retreated to 14385.

    Rates: Reshuffling SGD liquidity     
    The Monetary Authority of Singapore (MAS) announced that it would issue 6M Treasury Bills (replacing the 24W MAS Bills) starting July (see here). Assuming that there is no difference in the total issuance sizes between the two instruments, then there should be no change on total SGD liquidity. However, liquidity within the various segments would be impacted as a broader range of investors (asset managers, corporates and retail investors) have access to T Bills as opposed to MAS Bill (largely banks). There are approximately SGD 42bn worth of 24W MAS Bills outstanding which will be gradually replaced by the 6M T bills.

    There are upside risks to our SGD rates forecasts relative to USD rates. As mentioned last week (see here), SGD liquidity is already tight with short-term SGD rates (Sibor and SOR) pushing higher despite the fall in Libor. Moreover, banks’ costs have also risen as they are increasing the use of fixed deposits (which typically offer higher returns), instead of savings deposits, for their funding needs. With Sibor/SOR already elevated, we suspect that the take-up rate from corporates and retail customers (note that Singapore Savings bonds have been well-subscribed) may be firm. Accordingly, this reshuffling in asset allocation (and therefore SGD liquidity) implies that the Libor-SGD rates spread will be tighter than initially anticipated. 

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