Recalibrating optimism in FX and rates

Asia FX recalibrating optimism. Fed cuts vindicated as Nowcasts point to US growth below 1%.
Philip Wee, Eugene Leow21 Nov 2019
    Photo credit: AFP Photo

    FX: Recalibrating optimism

    The China-US Phase 1 trade deal is not headed the way both countries wanted. The mid-rate for USDCNY first bottomed at 6.99 on November 11, shortly after China started its push to roll back existing tariffs as a precondition for the deal. US President Donald Trump has resumed warning that US tariffs will increase without a deal.  To complicate matters, the US Senate and Lower House of Representatives have unanimously supported a Hong Kong Human Rights and Democracy Act. As optimism fade for a trade deal this year, the risk has returned for the planned US tariffs on December 15 to proceed. The mid-rate for USDCNY has moved up to 7.01 yesterday and could return to the 7.08 level from which it fell. Onshore spot CNY has already returned more than a third of its October rally.

    Emerging Asian currencies will also need to recalibrate the optimism discounted in the past couple of months. The Fed is less of a drag on the USD now that it sees little need for more rate cuts. Consequently, the SGD did not get a lift from this morning’s upward revision in Singapore’s GDP. The SGD has only given back around 17% of its October rally, less than the 51-57% retracement in the MYR and IDR and the 31% pullback in the KRW and PHP. Against this background, Thailand will probably step up efforts to prevent the THB from appreciating past 30 against the USD.

    Rates:  Fed nowcasts below 1% vindicating frontloaded cuts   
    Fed nowcasts (the average of St Louis and Atlanta Fed) now point to growth below 1%, suggesting that the Fed’s frontloaded rate cuts (75bps in total) were well-timed. Recession fears peaked in late August when many segments of the US Treasuries curve ware inverted and 10Y yields touched a low of 1.43%. Since then, optimism on a phase 1 China-US trade deal and aggressive Fed easing have allayed these fears somewhat, keeping 10Y yields in the 1.5-2.0% range.

    There are a couple of points to note about the Nowcasts. First, they tend to be volatile and tend to overshoot (in either direction) actual GDP growth numbers even if the guiding direction is generally correct. Second, 10Y US yields appear to have bottomed in late August. If we believe the yield curve to be a good predictor of future economic activity, 4Q19 and 1Q20 may mark a trough in US growth.  In any case, we see the Fed on hold. Fed minutes released yesterday reiterated that it would take a material change in outlook before acting. It would probably take a deterioration in China-US trade relations and / or a persistent string of weak US numbers heading into mid-2020 to prompt the Fed to cut. 

    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. DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong.

    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.