Macro Strategy: Pressure on US commercial property market; USD and China/US tensions

US CMBS delinquencies jump. Something has changed for FX.
Wei Liang Chang, Philip Wee09 Jul 2020
    Photo credit: Unsplash Photo

    Credit: US CMBS delinquencies jump

    Losses from lockdowns have manifested in the US commercial property market, as dining venues are shut and tourist arrivals plunge, deepening cashflow problems for tenants and sapping rental demand. Fitch reported this week that the US CMBS (commercial mortgage-backed securities) delinquency rate has posted the largest m/m jump on record, rising to 3.59% in June from 1.46% in May. The sharp increase points towards a further rise in US commercial property loan delinquencies, exacerbated by several states now pausing or reversing economic reopening.

    Unsurprisingly, the worst affected CMBS portfolio segments lie in hotels and retail, where loan delinquency rates surged to 11.5% (May:2.0%) and 7.9% (May:3.8%) respectively. Office and industrial property delinquencies have proved resilient, but also saw modest increases. This underscore how disruptions from COVID-19 have fallen in an uneven fashion across the economy. Credit stresses in hospitality and retail sectors will likely pose near-term concerns in the US and globally, especially if we continue to face multiple waves of COVID-19 infections.

    Lower rated BBB- CMBS spreads have eased from March highs and now stand at around 700bps, around the highs of 2012 and early 2016. If rising commercial property delinquencies result in a default rate higher than 2012’s level of 2.4%, CMBS spreads could face renewed upward pressure in the coming months.

    FX Daily: Something has changed

    USD had a bad Wednesday. Talks of a Death Cross, where the 50-day moving average cuts below the 200-day moving average, circulated during the Asian/European sessions and weighed on the DXY. Throughout most of the US session, commodity currencies did not fall with US stock markets when the daily new coronavirus cases in America hit 60k. Instead, AUD, NZD and CAD continued to appreciate with the CNH on the back of bullish Chinese equities. As CNH appreciated above 7.00 per USD for the first time since 11 March, AUD and NZD revisited their highs (around 0.70 and 0.6580 respectively) seen on 11 June. EUR’s upside was capped, for the fourth time since mid-June, around 1.1350. US stocks rebounded in the final hour of trading. Nasdaq closed at a new record high on the premise that the staying at home implied more demand for tech and online shopping/entertainment.

    Reports that the Trump administration was looking to undermine the HKD peg were dismissed. In fact, the Hong Kong Monetary Authority has been intervening this month to defend the lower (or stronger) limit of the 7.75-7.85 convertibility band for USDHKD. More importantly, the US cannot unilaterally revoke the HKD peg. The Linked Exchange Rates System (LERS) was established in October 1983 by Hong Kong and not by the US-Hong Kong Policy Act of 1992. The 1992 Act has, however, been amended last November by the US Congress via the Hong Kong Human Rights and Democracy Act. In late May, US Secretary of State Mike Pompeo certified that HKSAR no longer enjoyed a high degree of autonomy after the draft National Security Law for HKSAR was submitted to the National People’s Congress.

    President Donald Trump has pledged to revoke Hong Kong’s preferential treatment as a separate customs and travel territory from the rest China, more so now that President Xi Jinping has signed the law into effect on 30 June. This could lead the US to apply Chinese tariffs to Hong Kong’s exports. Given Hong Kong’s importance as the third largest forex centre and its status as an international financial centre closely integrated with the global economy and financial system, it is improbable that the US would deny Hong Kong access to the USD clearing system.

    Nonetheless, the incident was reminder that US-China tensions are set to heighten again ahead of the G20 Summit in September and the US elections in November. On the other hand, the stock markets in China and Hong Kong have rallied in July after the HK security law took effect on 30 June. Until incoming data undermines the V-shaped recovery discounted by markets, currencies are likely to struggle with the markets of the world’s two largest economies with a weak USD bias. The inverse relationship between the USD and US stock indices will now need to be balanced by the direct relationship between currencies and the Chinese markets (including the CNH).

    Chang Wei Liang

    Credit & FX Strategist


    Philip Wee

    FX Strategist - G3 & Asia

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