Averting a harsh Christmas as last two hurdles get cleared

Christmas cheer from asymmetrically friendly central bank policies and easing political gridlocks on trade and Brexit
Philip Wee, Eugene Leow13 Dec 2019
    Photo credit: AFP Photo

    FX: Averting a harsh Christmas

    Several key developments from this week ease some of the choke points that have started to weigh on business and consumer confidence. First, the Fed and ECB have reassured that monetary policies will remain accommodative amidst more upbeat tones for their economies. The Fed’s pledge to hold rates steady throughout 2020 will provide one important pillar of predictability to nurture the fragile recovery.

    China and the US have reportedly reached a Phase 1 trade deal in principle that would not only suspend US tariffs on December 15 but also include some tariff rollbacks. Offshore USDCNH has fallen below 7.00 with onshore USDCNY not far behind. The British pound has rallied to 1.35 in anticipation of a Tory majority at the UK election. If so, Prime Minister Boris Johnson and the Conservative Party would “Get Brexit Done” on January 31, 2020. Beyond this, Brexit is not over. Next comes the arduous task of negotiating UK’s future relationship with the EU within a shortened transition period that ends on December 31, 2020.

    In summary, Christmas is approaching with less pessimism of a harsh winter. The Fed and other central banks have helped to shovel the snow. The easing of trade and Brexit worries would warm Christmas dinners but prayers will be for the birds to return in spring. Mindful that the political gridlocks for trade and Brexit have only been loosened and not broken, speculators will be tempted to take profit near year-end.

    Rates: Last two hurdles cleared for the year
    Sentiment got a lift as the last two hurdles (uncertainties over the US’s December 15 tariffs on Chinese imports and UK’s general elections) got cleared. This mix of events and a Fed likely on hold for an extended period have reduced the uncertainty premium embedded in asset prices for large parts of this year. 10Y US yields are up by 14bps overnight, touching 1.93% (close to the top of the 1.5-2.0% trading range) amid a broad selloff across DM govvies. Contingent on a global cyclical recovery, we think that 10Y US yields will drift into the 2.0-2.5% range in 2020. In the short-term, however, we think that buying interest will emerge as 10Y yields approach 2%. We maintain our out of consensus call for 10Y US yields to touch 2.2% in end-2020 (consensus: 1.93%), a view we have held since late August.

    Asian assets are likely to cheer these positive developments with sizable FX moves over the past twelve hours. The performance in Asia govvies will be divergent. Lower-yielding govvies (including Singapore, Korea and Thailand) would likely see mild selloffs across most tenors given their higher correlation with DM rates. However, given the resultant Asia FX strength, yield increases in Asia are likely to be relatively muted compared to US. Meanwhile, the higher yielders (India and Indonesia) are likely to see some much-needed reprieve. The surprise Reserve Bank of India (RBI) hold shocked the market, bear flattening the curve in the process. For Indonesia, discussions to ease the 3% budget deficit limit has also spooked investors. With global events shaping up more positively, the appetitive to add risk should sooth nerves somewhat.


    Philip Wee

    FX Strategist - G3 & Asia


    Eugene Leow

    Rates Strategist - G3 & Asia

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