Except for Indonesia, EM Asia is expected to keep policy rates low (or lower) for
longer than we earlier thought — In the last month, India, Korea, Sri Lanka and
Vietnam cut policy rates, joining the ranks of other central banks that have surprised on
the dovish side (Australia, Israel, Poland and Turkey), not to mention spillover of BoJ’s
bazooka. We adopt a more dovish bias in our policy rate calls in China, India, Korea,
Sri Lanka, Thailand & Vietnam vs. the previous month, due to both slow growthdisinflation
trends, and for some, aversion to FX outperformance.
Slow growth and disinflation theme persists, supporting dovish bias — April has
been a disappointment, and the two May data readings we have so far – China’s HSBC
PMI and Korea’s exports in the first 20 days of May – are hardly encouraging. US
growth optimism driving expectations of QE tapering has not been accompanied by
manufacturing/export turnaround yet, thus the demand dampening impact of QE
tapering weighs on sentiment more. Inflation has significantly surprised to the
downside, and we expect this has more to go amid subdued commodity prices and
also favorable base effects in some countries (India, Philippines, Sri Lanka, Thailand
and Taiwan).
Financial stability risks may be partly addressed thru macroprudential tools —
Worries about financial imbalances are going to be a constraint for further policy easing
in some countries, but in general financial imbalances are hard to diagnose – worries
seem highest in China, but less conclusive in other countries for now. Some (e.g.
Thailand and Malaysia that have seen a buoyant credit cycle) may lean more on
macroprudential tools (MAS may serve as a guide after recently saying it has achieved
“some degree of success in the property and car markets”).
Cautious approach to FX gains/capital flows reinforces dovish bias in some — A
guarded approach to capital flows is evidenced by some (China, Philippines, Taiwan
and Thailand) recently introducing (or threatening to introduce in Thailand’s case)
measures to reduce net capital inflows. We think some will also implicitly use lower
interest rates as a policy tool to deter FX outperformance and capital flows – the
Philippines has been the most visible case, but Korea’s latest rate cut cites “influence
of yen weakening” and Thailand is under pressure as well.
Market Implications — We expect a tougher environment for Asia FX vs. USD outside
of CNY (but see INR correction as an opportunity to go long); further back up in US
long-end yields will prompt more curve steepening bias in some local and hard
currency curves, with a few exceptions. IDR bonds may bear flatten on inflation and
monetary policy impact of pending fuel price hike; recent SDA restrictions on trust
access loosening domestic liquidity conditions may continue to support already flat
PHP local bond curves. We still like INR bonds and other frontier markets that are more
a function of domestic dynamics
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longer than we earlier thought — In the last month, India, Korea, Sri Lanka and
Vietnam cut policy rates, joining the ranks of other central banks that have surprised on
the dovish side (Australia, Israel, Poland and Turkey), not to mention spillover of BoJ’s
bazooka. We adopt a more dovish bias in our policy rate calls in China, India, Korea,
Sri Lanka, Thailand & Vietnam vs. the previous month, due to both slow growthdisinflation
trends, and for some, aversion to FX outperformance.
Slow growth and disinflation theme persists, supporting dovish bias — April has
been a disappointment, and the two May data readings we have so far – China’s HSBC
PMI and Korea’s exports in the first 20 days of May – are hardly encouraging. US
growth optimism driving expectations of QE tapering has not been accompanied by
manufacturing/export turnaround yet, thus the demand dampening impact of QE
tapering weighs on sentiment more. Inflation has significantly surprised to the
downside, and we expect this has more to go amid subdued commodity prices and
also favorable base effects in some countries (India, Philippines, Sri Lanka, Thailand
and Taiwan).
Financial stability risks may be partly addressed thru macroprudential tools —
Worries about financial imbalances are going to be a constraint for further policy easing
in some countries, but in general financial imbalances are hard to diagnose – worries
seem highest in China, but less conclusive in other countries for now. Some (e.g.
Thailand and Malaysia that have seen a buoyant credit cycle) may lean more on
macroprudential tools (MAS may serve as a guide after recently saying it has achieved
“some degree of success in the property and car markets”).
Cautious approach to FX gains/capital flows reinforces dovish bias in some — A
guarded approach to capital flows is evidenced by some (China, Philippines, Taiwan
and Thailand) recently introducing (or threatening to introduce in Thailand’s case)
measures to reduce net capital inflows. We think some will also implicitly use lower
interest rates as a policy tool to deter FX outperformance and capital flows – the
Philippines has been the most visible case, but Korea’s latest rate cut cites “influence
of yen weakening” and Thailand is under pressure as well.
Market Implications — We expect a tougher environment for Asia FX vs. USD outside
of CNY (but see INR correction as an opportunity to go long); further back up in US
long-end yields will prompt more curve steepening bias in some local and hard
currency curves, with a few exceptions. IDR bonds may bear flatten on inflation and
monetary policy impact of pending fuel price hike; recent SDA restrictions on trust
access loosening domestic liquidity conditions may continue to support already flat
PHP local bond curves. We still like INR bonds and other frontier markets that are more
a function of domestic dynamics
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