Asia Rates: Pricing for the end
Recent rally and flattening in Asia ex China swaps suggest that markets are pricing for the end of hike cycles. In KRW and INR swaps, where the central banks have hiked more, we are seeing inversions and rate cuts being priced in for early 2024. In MYR and THB swaps, where the central banks have adopted a more gradual normalization approach, swaps curves are still upward-sloping and yet to invert, suggesting that their hike cycles would be more shallow but also extended. Broad flattening bias should stay until we get closer to the actual end of hike cycles.
KRW Rates - At tomorrow's BOK meeting, we expect a 25bps rate hike. BOK is likely to slow the hike pace to avoid exacerbating liquidity/credit strains that have emerged in domestic markets since the last meeting on 12 October. The recent large pullback in USDKRW also reduces concerns of FX-passthrough to inflation and thus, provides BOK with the room to hike 25 instead of previous 50bps. Swap markets will be watching the size of passthrough onto the 3M CD fixing rate. Considering that 3M CD's spread over policy rate is already very wide (102bps), the passthrough may be smaller than seen in previous rate hikes. I.e. 3M CD rate could rise by less than 10bps post the hike. Beyond the near-term impact of BOK hike, 3M CD could stay elevated for longer. Liquidity/credit strains in onshore markets are seeing signs of stabilization on the back of policymakers' response measures, but they are not easing yet. At this point, our base case assumption is that any material easing of liquidity/credit conditions may be delayed until we see the end of BOK's hike cycle.
IDR Rates - Yesterday’s conventional bond auction saw MOF take advantage of lower yields and improved bond sentiments to issue above its indicative target. Aggregate award came in at IDR15.2tn vs target IDR13.5tn. Based on several metrics, demand was stronger than in previous auctions. Total incoming bids amounted to IDR30.3tn and MOF issued a larger amount of long bonds (15/20/30Y) without incurring large tails.
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