A pivotal week for FX after recent sell-off; Asia rates look attractive
The topic for the Kansas Fed Jackson Hole central banking symposium on August 23 is aptly titled “Challenges for Monetary Policy”. Investors have betted that, with the entire US bond yield curve below the Fed Funds Rate, the Fed would need to deliver a large rate cut and soon. However, lead Fed dove, St Louis President James Bullard, warned late last week that the recent flight from equities into bonds was overdone. Hence, the recent one-way slide of yields could be facing challenges soon.
In Emerging Asia, the Thai baht may weaken past its key 31 level against the greenback. Today’s 2Q19 GDP data is expected to post the slowest growth (2.3% YoY consensus vs 2.8% previous) for Thailand since 4Q14. The Bank of Thailand recently lowered, on August 7, its policy rate by 25 bps to 1.50%. One of the reasons for the easing was the baht’s strength. The BOT has, on August 15, relaxed mortgage lending rules. New home loans growth has slowed to 7.8% YoY in 2Q19 from 9.1% in the previous quarter. Breaking above 31 would open the door for USDTHB to rise to 31.3.
Rates: Asia rates attractive as US yields plunge
Asia rates generally have not done as well as their USD counterparts through this recent bout of volatility. Recession fears and somewhat wobbly equity markets have dented sentiment, and this has prevented EM yields from falling as much as they should. Taking stock of where things stand, our Asia Rates Valuation Indicator (ARVI) suggests that relative value has emerged in Indonesia, Malaysia and India. Comparatively, local currency govvies generally looked overbought in mid-July. With inflation muted and the growth outlook still murky, monetary policy settings will be accommodative. Asia rates have room to drift lower once sentiment stabilises.
Meanwhile, we are neutral on USD rates after the sizable declines over the past few months. In fact, the rally in the ultra-long tenors look a bit stretched and we are wary of chasing yields lower. Moreover, the US is exploring the possibility of ultra-long tenor issuances (50Y, 100Y) to take advantage of low yields. Curve steepening (2Y/30Y) could take place over the coming months once the panic grab for yields fade. Meanwhile, watch for further Fed guidance at Jackson Hole towards the end of the week.
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