Profit taking on bearish USD bets; Asia govvies to ride on likely Fed & ECB easing

The greenback is likely to hold up into the Xi-Trump meeting at the G20 Summit this weekend. Asia govvies will ride on the monetary easing tailwind in the coming months.
Philip Wee, Eugene Leow26 Jun 2019
    Photo credit: AFP Photo

    FX: Profit-taking on bearish USD bets

    The euro’s rally has stalled at 1.14 against the USD. Euro bulls received a wakeup call from the European Central Bank who warned that negative interest rates and slow growth would hurt EU banks’ profitability. Financial stability is stronger in the US where big banks have passed the first round of the Fed stress tests. There was also some negative spillover into the euro from the British pound which traded below 1.27 again on hard Brexit fears. Leading Tory leader candidate Boris Johnson has been pushing for the UK to leave the EU with or without a deal on October 31.

    USD bears were taken aback by Fed Chairman Powell and St Louis Fed President Bullard who pushed back against aggressive market bets for a 50 bps rate cut at the next FOMC meeting on July 31. The Fed maintained that any rate cut will be an insurance move to guard against global headwinds from the trade war. Hit by the trade impasse in May, US consumer confidence fell sharply to 121.5 in June from 131.3 the previous month. Profit-taking has set in on gold which peaked at USD1440/oz yesterday and retreated to USD1416 this morning. This is a sign that the greenback is likely to hold up into the Xi-Trump meeting at the G20 Summit this weekend.

    Rates: Asia govvies to ride on likely Fed & ECB easing

    The prospect of likely Fed and European Central Bank (ECB) easing that comes on top of the Fed’s dovish pivot early this year suggests that the rally in government bonds may have further to run. Looking across the markets we track (G3 and Asia), 10Y yields are lower across the board since the start of the year. Meanwhile, economies that appear less exposed to trade war saw their currencies strengthen versus the USD, boosting total returns in the process. Comparatively, total returns are more muted in South Korea and Taiwan where yields were already low to begin with. Weak trade numbers have exacerbated matters with these two currencies showing the greatest weakness versus the USD this year.

    Asia govvies will ride on the monetary easing tailwind in the coming months. We think that central banks in the region are exhibiting caution ahead of the G20 and would probably want greater clarity from the Fed before easing. Notably, while the USD rates space has aggressively priced in Fed cuts, it was not until recently that Fed rhetoric turned somewhat more open to cuts. Last week, even as Indonesia and the Philippines refrained from cutting, their respective government bonds still held up well. The IDR and PHP rates space have probably not factored in sufficient easing and we think the front of their respective curves would do well when the easing cycle gets underway.

    Philip Wee

    FX Strategist - G3 & Asia

    Eugene Leow

    Rates Strategist - G3 & Asia

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