Trade war seesaw; Taking stock of rates

No breakdown or breakthrough in China-US trade talks. Asia rates have held up well.
Philip Wee, Eugene Leow27 Aug 2019
    Photo credit: AFP Photo

    FX: Trade war seesaw

    Investors were relieved that China-US trade negotiations have not broken down but they are not expecting any breakthroughs either. Major US indices rallied more than 1% in overnight markets with futures pointing to a weaker open today. The mid-rate for USDCNY was barely changed at 7.0570 on Monday vs 7.0572 last Friday but spot USDCNY rose to 7.1512, 1.3% above its mid-rate and closer to the offshore USDCNH at 7.1666. The above price actions suggest more market volatility ahead amidst the fluid trade war.

    The first round of China-US trade talks held in Shanghai in late July ended in mutual criticisms followed by China being labelled a currency manipulator and new rounds of tit-for-tat tariffs. The same red lines are likely to hinder progress at the Washington talks in early September. China wants negotiations to be based on equality and mutual respect. US President Trump is not about to change his whiplash strategy with China and has insisted that any deal must be on US’s terms. China cannot agree to a deal unless the US withdraw tariffs which US negotiators want as a tool of enforcement. Keep those seatbelts on.

    Rates: Taking stock of rates after the recent volatility   
    Sentiment pulled back from the brink as news emerged that China-US trade talks are still ongoing. Ostensibly, the market viewed this as a step down from the tariff trading that took place over the past few days. However, hopes for any kind of a deal are understandably still muted. The intraday swings over the past two trading days have been sizable (1.44% to 1.66%) as investors grapple with the twists in trade war narrative. In the absence of this escalation, we suspect that 10Y yields would be closer to 1.70%. Lingering trade war worries will keep haven demand ample but we are leaning towards the view the USTs (especially the longer-term ones) are expensive at current levels.

    Asia govvies have held up generally well through the recent bout of volatility. Even Indonesia (which has been traditionally vulnerable to swings in global sentiment) saw rates behave. By the close of the trading day, yields have barely budged from opening levels. We suspect that there may be a reluctance by investors to chase DM yields even lower and a growing recognition that Asia govvies offer pickup opportunities. Moreover, against a backdrop of slowing growth and muted inflation, the easing cycle will support frontend bonds. For longer-term bonds, Indonesia and Malaysia still screen well on our Asia Rates Valuation Indicator (ARVI).

    Philip Wee

    FX Strategist - G3 & Asia

    Eugene Leow

    Rates Strategist - G3 & Asia

    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.