Fed signals flexibility; rising odds of Indonesia and Philippines easing


The Fed signals flexibility on policy on increased uncertainties. This should drive Asia central banks to ease, benefitting govvies and rates in the process. The BOJ and CBC are likely to be in wait-a...
Philip Wee, Eugene Leow, Tieying Ma20 Jun 2019
    Photo credit: AFP Photo


    FX: Fed signals flexibility

    The Fed has added a dotted line to insurance rate cuts but did not sign off on a July move. Although the word patient was struck off the FOMC statement, the Fed’s economic projections reflected a cut in 2020 and none this year. The reaction to the FOMC meeting was understandably muted. Essentially, the Fed has acknowledged the two cuts fully discounted by the market. The US 10Y treasury bond yield traded lower but did not deviate far from the Fed’s 2% inflation target. The 0.1% rise in the Dow Jones Industrial Average paled in comparison to Tuesday’s 1.4% rally. The USD Index (DXY) fell 0.5% but found support at its 100-day moving average around 97.1. Expect more volatility into the Xi-Trump meeting next week. A thaw in trade relations would stay Trump’s hand at more tariffs on Chinese imports and push back expectations for a July cut and vice versa.

    Rates: Odds tilting higher for BSP & BI easing today

    The dovish note that the Fed struck has already sparked aggressive buying in US Treasuries. With 10Y US yields below 2%, we reckon that Asia rates/govvies (which offer high real and nominal yields) would benefit. Moreover, the prospect of looser US monetary policy has been communicated clearly and this should embolden Asia central banks to embark on more rate cuts. Odds of rate cuts in Indonesia and Philippines today have risen significantly. More cuts across the region (Korea, India) are likely to follow in the coming quarters. With the backdrop becoming increasingly similar to the quantitative easing era of 2011/12, Asia rates have room to drift lower as global yield scarcity bites.

    Japan & Taiwan: BOJ and CBC in wait-and-see mode

    The central banks in Japan and Taiwan are expected to stand pat today. The Bank of Japan has just strengthened forward guidance at the April meeting, pledging to maintain the extremely low levels of short-term and long-term interest rates “at least through around spring 2020”. Since then there has not been notable deterioration in Japan’s GDP, inflation, inflation expectation or labour market data. The BOJ should prefer to maintain status quo for the time being, to watch the results of the Trump-Xi meeting during next week’s G20 Osaka Summit, and to wait for more economic data, such as the Tankan business survey due July 1.

    That said, Governor Kuroda is likely to reinforce the view that the BOJ is ready to deploy additional stimulus measures, should external risks escalate further to threaten Japan’s growth/inflation outlook. Whether he will elaborate more on the available toolkits remains to be seen, given that short-term and long-term rates are both negative and the size of the BOJ’s balance sheet is already equivalent to 100% of Japan’s GDP. Reflecting the expectations for a dovish policy bias (as well as the decline in global yields), the 10Y JGB yield has fallen below -0.1% since early-June and touched -0.15% yesterday, but still within the BOJ’s ±0.2% target range.

    In Taiwan, the central bank (CBC) should also prefer a wait-and-see approach at today’s meeting, to watch the Trump-Xi meeting results and further assess the trade tensions between the US and China. While trade war poses a key threat to Taiwan’s growth outlook, the narrative is not entirely negative on the local ground. The government in fact sees trade war as an opportunity for it to attract the investment repatriation from the Taiwanese companies with operations on the mainland. And it has claimed success in the “Invest Taiwan” campaign so far this year (TWD 375bn investment applications from a total of 73 companies).

    The overnight TWD interbank rate has been somewhat volatile since end-May, fluctuating between 0.19%-0.22%, compared to a stable 0.18% previously. This was largely due to the seasonal factors related to tax payments, instead of capital outflows or expectations for monetary policy tightening. The CBC has injected liquidity to stabilise the interbank rates through open market operations, reducing the amount of outstanding CDs/NCDs by around TWD 400bn (5%) over the past four weeks. Expect the CBC to reiterate during today’s policy statement that monetary conditions remain appropriately accommodative and supportive of economic growth.

    Philip Wee

    FX Strategist - G3 & Asia
    philipwee@dbs.com

    Eugene Leow

    Rates Strategist - G3 & Asia
    eugeneleow@dbs.com

    Ma Tieying

    Economist - Japan, South Korea, & Taiwan
    matieying@dbs.com

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