USD trend amid monetary policy convergence; revising rates forecasts
Monetary policy convergence has become the dominant theme after the China-US tariff ceasefire struck at the G20 Summit on June 29. The currencies that depreciated most in the first week of July belonged to countries – South Korea, UK, Eurozone and Singapore – that have either downgraded or intend to lower their official growth forecasts. These countries have also opened the door to ease monetary policy to cushion their economies from a poorer global outlook weakened by the escalation in China-US trade tensions in May-June.
The US dollar index (DXY) has recovered after having found strong support around 96. The monetary policy tone in DXY’s major components, the euro and the pound, remain very dovish. The Fed has pushed back against political and market pressures for an aggressive easing this month. Record high US stock markets amidst a cooling of trade war risks have also unshut the door to keep the powder dry. Barring negative surprises in tonight’s US monthly jobs report, Fed Chairman Jerome Powell’s semi-annual testimony on Capitol Hill on July 10-11 may become a key event risk for USD bears and bond bulls.
Rates: Revising lower our forecast for PH, KR and TH rates
We have brought down some of our Asian interest rates forecast. For Philippines, 2Y and 10Y rates are revised lower by 65-75bps, largely a marking-to-market against the massive rally in RPGB bonds. In 2019, 10Y RPGB has returned ~20% (bulk of returns came from price, minimal contributions from coupon and FX). While we expect Bangko Sentral ng Pilipinas to ease policy ahead (policy rate cuts, reduction to banks' reserve requirement ratios) and inflation to moderate further, we think rates are unlikely to move much lower. Current spreads against US Treasurys, a proxy for risk premium, are around fair (we believe 250-350bps range to be appropriate). Furthermore, with considerable uncertainties over global trade and growth, we are wary that any sharp deterioration in risk sentiments could disproportionately hurt high-beta bonds like RPGBs.
For South Korea and Thailand, the revisions are much more modest. Both Bank of Korea (BOK) and Bank of Thailand (BOT) clearly stand out amongst regional and global central banks. Concerned by high household leverage and financial stability risks, they have yet to tilt dovish or give any clear signals of possible easing. With no noticeable improvements in economic momentum, one wonders how much longer can both hold out against the global wave of central bank dovishness.
BOK’s reluctance to consider rate cuts is keeping markets guessing and Korean front-end rates volatile. Current levels are probably too low (3Y tenor at ~1.40%) due to markets' overly aggressive pricing of BOK rate cuts. We have penciled in only 1 cut in 3Q19 with none thereafter through end-2020. 3Y rates should grind higher to ~1.60% level.
10Y Thai rates are likely to trade in a tight range around US rates. BOT's relative hawkishness vs US Fed argues for higher Thai vs US rates. However, that could be offset by possibly substantial bond inflows ahead, investors likely drawn to greater political clarity post-elections and strength of the Baht (ytd 2nd-best in EM, just behind RUB).
The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.
DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422.