FX up on reduced political risks, ECB easing "not if, but how much"


USDCNY eased towards 7.14, and all EM Asian currencies recorded gains for the day.In the face of weak data, the weight of further monetary easing is squarely on the European Central Bank.
Chang Wei Liang, Radhika Rao05 Sep 2019
    Photo credit: AFP Photo


    FX: Reduced political risks welcome

    Hong Kong’s leader, Carrie Lam, announced yesterday that the extradition bill, which had sparked months of civil unrest, will be formally withdrawn. Hopes are lit on a possible de-escalation in the coming weeks. The Hang Seng Index rallied as soon as reports flagged the impending announcement, with the property sub-index up by 7.4% from the previous close. The positive turn in sentiment towards Hong Kong aided a broad firming in regional equities and currencies. USDCNY eased towards 7.14, and all EM Asian currencies recorded gains for the day. China’s state council is now calling for a timely reduction in both broad and targeted reserve ratio. This may provide a fillip for Asian currencies today, if inflows to the region are revived on prospects of Chinese stimulus.

    Another pleasant political development is that Italy’s Five Star Movement supporters have agreed to a coalition with the moderate PD. Previous concerns over a deadlocked legislature are thus soothed. The UK offers further relief after Parliament voted to block a no-deal Brexit again, followed by a rejection of PM Johnson’s call for early elections on Oct 15. Three defeats for the PM sets the stage for an extension of the Brexit date, providing valuable time for renegotiations. GBPUSD rebounded towards mid-1.22, but we expect GBP to remain weighed as no-deal risks are reduced but not fully eliminated.

    Eurozone: ECB easing “not if, but how much”

    Second estimate of Eurozone GDP growth due tomorrow will confirm that the bloc expanded at half the pace of 1Q in 2Q, at 0.2% QoQ. Germany, is under recession watch as business surveys soften, weighed by car-industry woes and weakness in capital goods output, in turn reflecting weaker demand from China and other Asian markets. EUR depreciation vs USD (-10% since early 2018) and on effective exchange rate basis, has not provided sufficient fillip as yet.

    In the face of weak data, the weight of further monetary easing is squarely on the European Central Bank. The Governing Council meets next week, where it will prefer to act pre-emptively to address low inflation and near-stagnation in growth. Apart from trade-related uncertainty, fallout from Italian political uncertainty and Brexit-led volatility will also keep policymakers on tenterhooks.

    A mix of easing measures is on the cards – dovish forward guidance, 10bp cut in the deposit facility rate (currently at -0.4%), introduction of a tiered deposit scheme, (which will turn) LTROIII on attractive terms and signals that asset purchases might resume later in the year. The Council is split on the prospect of resuming QE, with the hawks cautioning against turning hostage to market expectations.

    Decline in inflationary expectations pose doubts over the material impact of policy action. Overnight rates are pricing in 10-20bp cuts to the deposit rates, while bond spreads of Italy/France vs Bunds tighten, despite growth and fiscal troubles at home. As monetary policy hits its limits, pressure for fiscal support is likely to rise.


    Chang Wei Liang

    Credit & FX Strategist
    weiliangchang@dbs.com

    Radhika Rao

    Economist – India, Thailand & Eurozone
    radhikarao@dbs.com

    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.