Staying neutral this week

USD interest rates are about appropriate at current levels. Exchange rates are range-bound in the quiet week ahead.
Eugene Leow, Philip Wee18 Nov 2019
    Photo credit: AFP Photo

    Rates: Speculative positioning across USD rates space broadly neutral

    Net non-commercial futures positioning across the US Treasuries space is now broadly neutral. Positioning in futures, when stretched, tend to be a contrarian signal for the market. For example, the total net shorts (2Y, 5Y and 10Y) touched a record in September 2018. What followed was a massive rally in USTs that drove 10Y yields to 1.43% in August 2019 (down about 180bps over the period). As the Fed cut a cumulative 75bps in this easing cycle, the market and the Fed are now more aligned as to where the appropriate monetary policy settings should be. Notably, the UST curve is now broadly normalized (generally upward sloping across most segments).

    We think USD rates are about appropriate at current levels and would likely drift higher in the coming quarters. With global economic data generally still weak, conditions are still broadly supportive of low rates across the developed markets. Moreover, pricing in the risk of modest easing (about one Fed cut over the coming year) makes sense given lingering uncertainties in the China-US trade talks, Brexit and ongoing Hong Kong unrest. If these risks dissipate, we suspect that there would be another modest leg higher in US/DM yields. However, upside would be capped until there are more concrete signs of a global electronics upswing.

    FX: More likely to stay range-bound this week

    Markets are on the prowl for good news but exchange rates are likely to remain range-bound in the quiet week ahead. Fed Chairman Jerome Powell cited, during his testimony to US lawmakers, optimism in the US economy for the Fed’s decision to end its mid-cycle adjustment after the third rate cut on October 30. On the other hand, Germany and the UK have averted a technical recession in 3Q19. Two Bank of England members, however, did vote for a rate cut. While polls show UK Prime Minister Boris Johnson and his Conservative Party having widened their lead over the Labour Party, Moody’s have put UK’s sovereign debt rating on negative watch on the fiscal spending increases and borrowing plans of the main political parties.

    US stocks had closed at record highs last week on hopes that China and the US are moving closer towards a Phase 1 trade deal. But it remains to be seen if the US would agree to China’s insistence to roll back some existing tariffs. On a positive note, there was no repeat of the May backlash that renewed the tariff war. China’s economic slowdown worries have been partly assuaged by the central bank’s counter-cyclical adjustment measures that included cuts in the reserve requirement ratios and the 1Y loan prime rate. Yet, this has not prevented expectations for China’s growth to slow below 6% next year. This morning’s weaker-than-expected Singapore non-oil domestic exports in October (-12.3% YoY actual vs -10% consensus and -8.1% previous) was a reminder that the global recovery ahead is still challenging.

    Eugene Leow

    Rates Strategist - G3 & Asia

    Philip Wee

    FX Strategist - G3 & Asia

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