Macro Strategy


Keep those seat belts buckled
Philip Wee, Eugene Leow07 May 2019
    Photo credit: AFP Photo


    FX: Keep those seat belts buckled

    The Chinese yuan is not out of the woods. It led the currency sell-off in Asia on fears that US-China trade negotiations could break down. The yuan is set to depreciate further if it fails to hold its support around 6.7630, where its 100-day moving average is located. For now, markets are relieved that talks in Washington are not cancelled but delayed a day to Thursday; Chinese Premier Liu He is said to leading the Chinese delegation.

    US Trade Representative Robert Lighthizer clarified that US President Donald Trump’s threat to increase US tariffs on USD200bn worth of Chinese goods to 25% from 10% this Friday was attributed to China backtracking on commitments agreed during negotiations. Renewing the truce would not be easy. Trump’s tough stance is popularly supported by Americans and Congress. The US economy has weathered the trade tensions as evidenced by three straight quarters of at/above 3% YoY growth into 1Q19. If the Trump administration stands firm on not accepting any watered deal, there is no guarantee that China would not walk away.

    According to Monday’s price action, the Turkish lira and the Argentine peso led the sell-off in emerging market currencies. Argentina has stepped up intervention after the peso fell to a new record low. South Korea is standing by to respond to increased market volatility; the won is the region’s worst performing currency this year. Indonesia intervened to stabilize the rupiah which had come under pressure from an untimely below-consensus GDP report yesterday. With trade tensions seen hurting the demand for commodities (e.g. oil prices fell), the Australian dollar and the New Zealand dollar could extend their depreciation if their central banks cut rates this week. Consensus expects policy rates in Australia and NZ to fall 25 bps to 1.25% (today) and 1.50% (tomorrow) respectively.

    Rates: US yields stuck in range    

    The final stretch of the China-US trade negotiations this week will be the key event to watch, overshadowing US PPI and CPI numbers due on 9th and 10th May respectively. Risky assets were generally priced for a favourable trade talk outcome with US and China stock indices enjoying the tailwind of favourable trade talk news flow. This came to a halt when Trump threatened to impose additional tariffs on Chinese imports, suggesting that events may not be proceeding as smoothly as the market expects. Clearly, the odds of no-deal (and additional tariffs kicking in next week) has risen. Markets have reacted accordingly, driving risky assets down while nudging 10Y US yields below 2.50%.

    Beyond the trade war noise, US yields appear to be in no hurry to head higher. Technically, the 2.35%-2.60% trading range for 10Y yields still holds. While downside risks to the global economy have receded somewhat and prices may be stabilising, there are no obvious drivers for sharply higher inflation (that could prompt the Fed to hike rates or the market to raise inflation expectations) just yet. Last Friday’s payrolls were firm, but we should note that yields were more sensitive to the lower-than-expected hourly earnings (actual: 0.2% MoM sa, consensus: 0.3%).

    Philip Wee

    FX Strategist - G3 & Asia
    philipwee@dbs.com

    Eugene Leow

    Rates Strategist - G3 & Asia
    eugeneleow@dbs.com

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