Asia Rates: CNY Rates on upward trajectory

RRR cut in China, tight liquidity in India, support measures for South Korean markets
Group Research, Duncan Tan29 Nov 2022
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    CNY Rates - China’s State Council's signal of RRR cut lay Wednesday saw swap rates and bond yields fall. But since then, rates and yields have reversed the decline and climbed higher. While a RRR cut is an easing measure, markets are likely to instead focus on the positive growth implications via spurring credit growth. Therefore, we think the RRR cut doesn't change the medium term upward trajectory for CNY Rates. We had in the last couple of weeks judged that CNY Rates have overshot in the near term on reopening optimism, and that there would be small pull backs due to rising COVID cases and wider lockdowns. However, recent news reporting of public discontent and protest against COVID measures have changed our thinking. All else equal, policymakers now could consider bringing forward the reopening timeline, earlier than market expectations. Both the RRR cut and possible early reopening point to steepening in swap and bond curves.

    INR Rates - Liquidity seems to be tight again as money market rates (overnight call, repo) have returned to near the upper bound of LAF corridor. November's steep drop in oil prices is positive for INR Rates via oil's impact on India's inflation, external and fiscal. That said, the current account deficit has stayed wide and RBI has had to use a large amount of FX reserves to offset external pressures. Market's focus will be shifting to the budget in February and its associated financing needs. There has been news reporting that authorities want to narrow the budget deficit by at least 0.5%, to less than 6% of GDP. GSec supply could still stay high in FY23/34, and with tighter liquidity, market absorption of the supply could be challenging.

    KRW Rates - MOEF has announced additional support measures to stabilize domestic fixed income markets. State-run organizations, such as KEPCO, will be asked to reduce issuances or turn to bank loans. There will be a second capital call of KRW5tn for the bond market stabilization fund, of which financial institutions can repo up to KRW2.5tn with BOK for liquidity. Planned KTB issuances will also be lowered to KRW3.8tn in December. Post BOK's 25bps hike last Thursday, 3M CD fixing has risen a mere 1bps to 4.03%. We see another 50bps of BOK hikes in 1Q to reach terminal policy rate of 3.75% and it is possible that passthrough from the next 50bps of hikes onto 3M CD could also be small.

    Duncan Tan

    Rates Strategist - Asia
    [email protected]

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