Asia FX Talk - PBOC shifting to short-term rates

PBOC announced yesterday that it will conduct ad hoc repo and reverse repo operations to add or drain interbank liquidity when necessary.

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Ahead Today

G3: Fed Chair Powell semi-annual testimony to Congress, NFIB Small Business Optimism Index

Asia: Taiwan Exports

Market Highlights

Markets seemed calmer and took the French Election results in their stride, even as it’s unclear which coalition in France if any can be mustered to form a government. French 10-year spreads with Germany yields tightened further to 62bps, while EURUSD rose to 1.0831 reversing losses against the Dollar. The New York Fed 1-year ahead inflation expectation print moderated to 3% from 3.1% previously. Overall, global markets are waiting for better clarity from Chair Powell’s semi-annual testimony to Congress starting today, coupled with the important US CPI print on Thursday.

One market where risk sentiment was bearish was the Chinese stock market, where expectations on meaningful reforms out of next week’s Third Plenum are reasonably low. One driving factor for the weak sentiment also seems to be a hawkish interpretation on PBOC’s announcement yesterday that it will conduct ad hoc repo and reverse repo operations to add or drain interbank liquidity when necessary. Rates on these operations will be set at 20bps below and 50bps above the 7-day reverse repo rate (currently at 1.8%). These moves resulted in a sell-off in China rates and also pushed up onshore CNY FX forward points to some extent. While these shifts have been telegraphed by PBOC Governor Pan Gonsheng to some extent as part of broader interest rate reforms in China, they likely also signal authorities’ discomfort over the fast pace of China bond yield declines. The big picture for China is that the economy remains soft and in need of further policy stimulus, and as such the bias for policy is if anything towards easing over the rest of this year

Regional FX

Regional FX

Asian FX markets were mixed and as with global markets are waiting for better direction from Chair Powell’s testimony to Congress, coupled with the US CPI out later this week. Outperformers include the THB (+0.5%) while most other pairs traded within a tight range at USDCNH at 7.287. Thai PM Srettha Thavisin will hold a briefing on the government’s 500bn baht cash handout project on July 24 after finalizing the details, with the government saying it is still committed to distribute the cash in 4Q. We remain positive on THB given our expectation for fiscal spending improvement, tourism pickup, coupled with a central bank which continues to defy calls for rate cuts by the government. Meanwhile, Indonesia announced a wider fiscal deficit target of 2.7% of GDP for 2024, from an initial forecast of 2.29%. Nonetheless, IDR did not move much on this news, indicating that these shifts have already been priced in to some extent. 

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