Macro Strategy: Indonesia’s credit outlook; USD bears have a bad day
Credit: Indonesian credit to look past Q2 slump
Indonesia has just reported its worst-ever GDP read, with the economy contracting 5.3% (y/y) in Q2. However, weaker than expected growth outturn should not lead to a renewed sell-off in Indonesian USD credit. For one, the worst part of the decline is already over, with Indonesia’s private manufacturing PMI having rebounded sharply to 46.9 for July from 39.1 previously. Moreover, USD/IDR has remained largely stable in remain months, suggesting that external debt burdens should remain largely manageable.
The relationship between USD/IDR and Indonesian USD credit spreads has been historically tight, with IDR depreciation being usually accompanied by Indonesian credit spread widening. With market sentiment showing a quick recovery since late March, both USD/IDR and Indonesia’s aggregate USD credit spread have jointly retraced from year-to-date peaks by 74% and 63% respectively. Given the extent of credit spread and FX recovery already seen, the scope for further gains could be more limited in the short-term.
FX Daily: Stronger US data kept USD bears at bay
EUR and GBP are still range-bound at 1.17-1.19 and 1.30-1.32 respectively. Despite firmer US stock indices, EUR and GBP retreated after they tested their end-July highs around 1.19 and 1.3160 respectively. US ISM PMIs this week have beaten expectations and improved further in July to 58.1 for services and 54.2 for manufacturing, above their corresponding pre-pandemic (February) levels of 57.1 and 52.6. Although the US labour market added fewer jobs in July, the US economy is not as weak as markets initially. If tonight’s US initial jobless claims fall below 1.4mn for the first time in three weeks, markets may have been too hasty in underestimating the US especially against its EU counterparts. While sequential GDP growth has fallen harder in the US than the EU in 2Q, it also likely to rebound stronger in the US in 3Q. Despite the lower US nonfarm payrolls expected this Friday, the US unemployment rate is still expected to fall, in contrast to the rising jobless rate in the Eurozone.
All eyes will also be on the Bank of England meeting today. No policy action is expected today. The BOE is scheduled to increase, by end-2020, its bond holdings to GBP725bn from the present GBP640bn. The focus will be on the guidance which is likely to err on the side of caution. Prime Minister Boris Johnson and his administration have started preparations for a possible coronavirus resurgence this winter. Brexit talks with the EU have not made much progress; a weak trade deal or no trade deal is still possible. After its sharp 5.5% appreciation in July, GBP will be vulnerable to any sign of the BOE inching towards zero or negative rates.
USDCNY closed lower at 6.9366 on Wednesday, near the 6.9260 low seen in March. This was well below the 7.00 level when the mid-rate (6.9752 on Wednesday) was last adjusted below 6.98 on 22 July. As witnessed ahead the signing of the Phase 1 trade deal in mid-January, CNY may be strengthening below 7.00 per USD ahead of US-China trade talks on 15 August. Given that this is a review of China’s compliance with the Phase 1 deal, no one expects this meeting to ease the heightened tensions between the world’s two largest economies, not with the US elections just three months away in November. Hence, it remains to be seen if USDCNY is ready to break out of its +/-2% band around 7.00 established since mid-2019.
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