global markets outlook 2h 2019 - ocbc

Global Markets Outlook – 2H 2019

July 2019

Emmanuel Ng

Terence Wu

Treasury Research & Strategy

Global Treasury

1

G10 Outlook

2

3

Global landscape

• Macro indicators have taken a turn for the worse again in 2Q19 after an

attempted consolidation in 1Q19.

• Global economic deceleration already fully internalized – US yield curve (3/10s,

5/30s) searching for a recession.

• With a renewed deflation backdrop and heightened global trade tensions,

central banks are expected to embark on further accommodation – bond rally to

persist.

• Relativity remains the name of the game in FX – US Federal Reserve vs. its

counterparts – late cycle behavior.

• USD may be volatile in the near term, pending the demeanor of the July

FOMC.

• JPY, CHF (and XAU) to effectively manifest any discretionary USD

vulnerability. EUR may surprise if the ECB is less of a dove than expected.

• GBP to continue to decay under the weight of Brexit.

• AUD threatened by the China complex and global macro deceleration.

4

Global backdrop – Convergence still in play

Source: OECD, Bloomberg, OCBC

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

Jan-1

9

12m %chg

US CLI G7 CLI EZ CLI JP CLI

• US economy is losing its exceptional status, but the slowdown is from a

relatively higher base.

• Leading indicators in the US are easing in-line with the ROW (rest-of-world).

• No light at the end of the tunnel yet for the global economy.

44.00

46.00

48.00

50.00

52.00

54.00

56.00

58.00

60.00

Aug

-11

Fe

b-1

2

Aug

-12

Fe

b-1

3

Aug

-13

Fe

b-1

4

Aug

-14

Fe

b-1

5

Aug

-15

Fe

b-1

6

Aug

-16

Fe

b-1

7

Aug

-17

Fe

b-1

8

Aug

-18

Fe

b-1

9

6mmaGlobal PMIs

US PMI JP PMI EZ PMI EM PMI

5

Global backdrop – relativity remains crucial

• Higher frequency data showing ongoing economic deterioration in the US, and

may yet deteriorate further.

• Meanwhile, Europe is showing improvement, but selected key indicators

continue to spark concern. Some (very) nascent signs of improvement also in

Asia/China, but prospects of a meaningful recovery with any sort of traction

into 2H19 are dimming.

-80

-60

-40

-20

0

20

40

60

80

100

Aug

-1

2

Fe

b-1

3

Aug

-1

3

Fe

b-1

4

Aug

-1

4

Fe

b-1

5

Aug

-1

5

Fe

b-1

6

Aug

-1

6

Fe

b-1

7

Aug

-1

7

Fe

b-1

8

Aug

-1

8

Fe

b-1

9

OCBC US Macro Surprise Diffusion Indices

6M MSI

+ve data surprises

-ve data surprises

-100

-80

-60

-40

-20

0

20

40

60

80A

ug

-12

Fe

b-1

3

Aug

-13

Fe

b-1

4

Aug

-14

Fe

b-1

5

Aug

-15

Fe

b-1

6

Aug

-16

Fe

b-1

7

Aug

-17

Fe

b-1

8

Aug

-18

Fe

b-1

9

OCBC EZ Macro Surprise Diffusion Index

6M MSI

+ve data surprises

-ve data surprises

-100

-80

-60

-40

-20

0

20

40

60

80

Aug

-12

Fe

b-1

3

Aug

-13

Fe

b-1

4

Aug

-14

Fe

b-1

5

Aug

-15

Fe

b-1

6

Aug

-16

Fe

b-1

7

Aug

-17

Fe

b-1

8

Aug

-18

Fe

b-1

9

OCBC Asia Macro Surprise Diffusion Index

6M MSI

+ve data surprises

-ve data surprises

Source: Bloomberg, OCBC

6

Macro deceleration is a (very) mature story

• Downward march of global core yields has been relentless, but bond bulls

may not be done just yet.

-0.50

-0.30

-0.10

0.10

0.30

0.50

0.70

0.90

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

%EZ

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

3.00

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

%

AU

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

%

JP

1.902.002.102.202.302.402.502.602.702.802.903.003.103.203.30

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

%US

Source: Bloomberg

7

Global inflation expectations softening (again)

• Global inflation firmed up in 1Q 2019, but the renewed decline in crude prices

in 1H 2019 may yet again depress global inflation expectations.

• The need to entrench inflation expectations at previous levels may underlie

the central banks’ easing bias in 2H 2019.


-80

-60

-40

-20

0

20

40

60

80

100

120

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

Jan-1

9

%%

OECD Headline inflation Asia Headline inflation WTI (RHS)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan-1

5

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

Apr-

16

Jul-1

6

Oct-

16

Jan-1

7

Apr-

17

Jul-1

7

Oct-

17

Jan-1

8

Apr-

18

Jul-1

8

Oct-

18

Jan-1

9

Apr-

19

%

Global 10y Breakevens

US GE JP UK CA AU

8

Depth of Fed rate cut cycle in focus

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Jan-1

4

Jul-1

4

Jan-1

5

Jul-1

5

Jan-1

6

Jul-1

6

Jan-1

7

Jul-1

7

Jan-1

8

Jul-1

8

Jan-1

9

Jul-1

9

%

ED future 1y calendar spread

88

90

92

94

96

98

100

102

104

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

Ja

n-1

7

Fe

b-1

7

Ma

r-17

Ap

r-17

Ma

y-1

7

Ju

n-1

7

Ju

l-1

7

Au

g-1

7

Se

p-1

7

Oct-

17

Nov-1

7

Dec-1

7

Ja

n-1

8

Fe

b-1

8

Ma

r-18

Ap

r-18

Ma

y-1

8

Ju

n-1

8

Ju

l-1

8

Au

g-1

8

Se

p-1

8

Oct-

18

Nov-1

8

Dec-1

8

Ja

n-1

9

Fe

b-1

9

Ma

r-19

Ap

r-19

Ma

y-1

9

Ju

n-1

9

Ju

l-1

9

10y rate differentials vs. USD

USD weighted interest rate differential DXY INDEX

Rate Gap (%)

• The Fed has unequivocally shifted to an easing bias (July FOMC to set the

tone), but it has also pushed back against excessively dovish market

expectations. House view: Fed to cut 50 bps by end of Q3 2019, and another

25 bps in Q4 2019.

• In the medium term, a softer Fed posture makes it easier for the other central

banks to institute their own monetary accommodation. Differing speeds of

accommodation across central banks to create space for volatility.


9

ECB: A bigger dove than the Fed? Or not?

• The full range of monetary easing options (including rate cuts) is still open at

the ECB, with Draghi still concerned over the lack of price pressures in the

Eurozone. The ECB may yet shape up to be the bigger dove than the Fed.

• However, note some improvement in the macro outlook in Europe (relative to

the US). ECB may potentially under-deliver relative to easing expectations in

the 2H 2019 – tempering excessive EUR weakness.

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.01.00

1.10

1.20

1.30

1.40

1.50

1.60

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

Jan

-18

Jan

-19

%

EUR-USD US-EZ 5y5y Forward Swap

0.985

0.990

0.995

1.000

1.005

1.010

1.015

1.020

-30

-20

-10

0

10

20

30

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

6M lead% yoy

EUR-USD Relative leading indicator (RHS)

-20

-15

-10

-5

0

5

10

15

20

25

1.00

1.10

1.20

1.30

1.40

1.50

1.60

Ju

l-0

8

Ju

l-0

9

Ju

l-1

0

Ju

l-1

1

Ju

l-1

2

Ju

l-1

3

Ju

l-1

4

Ju

l-1

5

Ju

l-1

6

Ju

l-1

7

Ju

l-1

8

EUR-USD Relative Man PMI Index (lead 3)

%yoyin rel. PMIs

Stronger USD

Weaker USD

Source: Bloomberg, OECD, OCBC

10

The other major central banks

Source: OECD, OCBC

• Two quick-fire cuts in June-July may now give the RBA some room for pause,

but the bias remains for further rate cuts by the end of the year.

• BOJ still committed to add stimulus if momentum towards its inflation target

stalls, but it may have limited levers to pull at this stage.

• Meanwhile, the BOE’s hands may be tied as long as Brexit is not resolved

while the Bank of Canada is seen stationary relative to the Fed.

0.980

0.985

0.990

0.995

1.000

1.005

1.010

1.015

1.020

-20

-15

-10

-5

0

5

10

15

20

25

30

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

Jan-1

9

% yoy

USD-JPY Rel Leading indicator (6m lead)

0.98

0.99

1.00

1.01

1.02

1.03

1.04

1.05

-35

-25

-15

-5

5

15

25

35

45

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

Jan-1

9

Jan-2

0

3mma, % yoy

AUD-USD AU-US Rel leading indicator (12m lead)

11

Positioning favouring the USD for now

Source: Bloomberg, CFTC, OCBC

70

75

80

85

90

95

100

105-50,000

-40,000

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

11/0

1/2

008

11/0

1/2

009

11/0

1/2

010

11/0

1/2

011

11/0

1/2

012

11/0

1/2

013

11/0

1/2

014

11/0

1/2

015

11/0

1/2

016

11/0

1/2

017

11/0

1/2

018

11/0

1/2

019

USD mnLeveraged Positioning

Net USD positioning (USD terms)

Net USD Positioning excl JPY (USD terms)

DXY Index

Long Dollar Bias

Short Dollar Bias

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

14

16

18

20-20

-15

-10

-5

0

5

10

15

20

25

30

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

Jan-1

9

6mma % yoy(inverse scale)

% yoy

Global Man PMI USTWI

• Leveraged accounts continue to accumulate net long USD positioning while

asset manager accounts have been paring net dollar shorts.

• “Dollar Smile” in action.

12

In sum: Late stage dynamics in play

• July FOMC may set the early tone for the USD in 2H 2019, but we need to

continually assess the relative posturing between the core central banks.

• Any near-term Fed-driven USD weakness may be best expressed through the

JPY and CHF. Structurally, the EUR may be whipsawed by potential surprises

from the ECB, while the AUD may be hampered on the slower global outlook.

1.09

1.11

1.13

1.15

1.17

1.19

1.21

1.23

1.25

1.27

4-J

ul-1

7

4-S

ep

-17

4-N

ov-1

7

4-J

an-1

8

4-M

ar-

18

4-M

ay-1

8

4-J

ul-1

8

4-S

ep

-18

4-N

ov-1

8

4-J

an-1

9

4-M

ar-

19

4-M

ay-1

9

4-J

ul-1

9

EUR-USD

Actual Fitted

104

106

108

110

112

114

116

4-J

ul-1

7

4-S

ep

-17

4-N

ov-1

7

4-J

an-1

8

4-M

ar-

18

4-M

ay-1

8

4-J

ul-1

8

4-S

ep

-18

4-N

ov-1

8

4-J

an-1

9

4-M

ar-

19

4-M

ay-1

9

4-J

ul-1

9

USD-JPY

Actual Fitted

1.23

1.28

1.33

1.38

1.43

4-J

ul-1

7

4-S

ep

-17

4-N

ov-1

7

4-J

an-1

8

4-M

ar-

18

4-M

ay-1

8

4-J

ul-1

8

4-S

ep

-18

4-N

ov-1

8

4-J

an-1

9

4-M

ar-

19

4-M

ay-1

9

4-J

ul-1

9

GBP-USD

Actual Fitted

1.20

1.22

1.24

1.26

1.28

1.30

1.32

1.34

1.36

1.38

4-J

ul-1

7

4-S

ep

-17

4-N

ov-1

7

4-J

an-1

8

4-M

ar-

18

4-M

ay-1

8

4-J

ul-1

8

4-S

ep

-18

4-N

ov-1

8

4-J

an-1

9

4-M

ar-

19

4-M

ay-1

9

4-J

ul-1

9

USD-CAD

Actual Fitted

0.67

0.69

0.71

0.73

0.75

0.77

0.79

0.81

4-J

ul-1

7

4-S

ep

-17

4-N

ov-1

7

4-J

an-1

8

4-M

ar-

18

4-M

ay-1

8

4-J

ul-1

8

4-S

ep

-18

4-N

ov-1

8

4-J

an-1

9

4-M

ar-

19

4-M

ay-1

9

4-J

ul-1

9

AUD-USD

Actual Fitted


Asian Outlook

13

14

Asian landscape

• Asia is ground zero for global trade tensions and the current macroeconomic

malaise.

• Asian central banks are now more amenable to further policy accommodation

with:

• the cue from core global central banks;

• inflation posing little threat and still relatively benign.

• Risk appetite levels remain fairly conducive on the back of the market’s current

premise of concerted global monetary policy relaxation.

• Carry increasingly attractive. With global core yields still being chased lower,

diversionary flows into EM/Asia may continue to ensue.

• Sino-US trade tensions remain a potential flashpoint but expect an anchor of

stability from China.

• Caveats:

• Global trade tensions overshadow global monetary easing

• The Fed under delivers on expected rate cuts

15

Asian macro picture does not inspire confidence

Source: CEIC, Bloomberg, OCBC

44.0

46.0

48.0

50.0

52.0

54.0

56.0

Aug

-11

Fe

b-1

2

Aug

-12

Fe

b-1

3

Aug

-13

Fe

b-1

4

Aug

-14

Fe

b-1

5

Aug

-15

Fe

b-1

6

Aug

-16

Fe

b-1

7

Aug

-17

Fe

b-1

8

Aug

-18

Fe

b-1

9

6mmaAsian PMIs

EM PMI CN SK TW SG

46.0

48.0

50.0

52.0

54.0

56.0

58.0

Aug

-11

Fe

b-1

2

Aug

-12

Fe

b-1

3

Aug

-13

Fe

b-1

4

Aug

-14

Fe

b-1

5

Aug

-15

Fe

b-1

6

Aug

-16

Fe

b-1

7

Aug

-17

Fe

b-1

8

Aug

-18

Fe

b-1

9

6mmaAsian PMIs

TH MY ID IN PH

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

Jan-1

9

3mma

Asian Export Z-score

CN Asia (ex-CN, JP)

• Both manufacturing PMI and export

prints appear to be accelerating lower.

• Overall deteriorating Asian economic

trajectory still not showing signs of

bottoming heading into 2H 2019.

Ongoing Sino-US trade uncertainties

also do not bode well on this front.

16

Asian inflation picture soft

• Core inflation prints in Asia generally suppressed but core inflation in China

reverting to a downtrend. Meanwhile, Asian headline prints are attempting to

consolidate.

• Crude prices remain a wild card – especially if global trade war uncertainty spills

over to real economic variables.

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

7.5

9.0

Jan

-01

No

v-0

1

Se

p-0

2

Jul-

03

Ma

y-0

4

Ma

r-0

5

Jan

-06

No

v-0

6

Se

p-0

7

Jul-

08

Ma

y-0

9

Ma

r-1

0

Jan

-11

No

v-1

1

Se

p-1

2

Jul-

13

Ma

y-1

4

Ma

r-1

5

Jan

-16

No

v-1

6

Se

p-1

7

Jul-

18

Ma

y-1

9

Headline Inflation

Asia (Ex-Japan & China) China

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Jan

-01

No

v-0

1

Se

p-0

2

Jul-

03

Ma

y-0

4

Ma

r-0

5

Jan

-06

No

v-0

6

Se

p-0

7

Jul-

08

Ma

y-0

9

Ma

r-1

0

Jan

-11

No

v-1

1

Se

p-1

2

Jul-

13

Ma

y-1

4

Ma

r-1

5

Jan

-16

No

v-1

6

Se

p-1

7

Jul-

18

Ma

y-1

9

%

Core Inflation

Asia (Ex-Japan & China) China


17

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan-12

Jul-1

2

Jan-13

Jul-1

3

Jan-14

Jul-1

4

Jan-15

Jul-1

5

Jan-16

Jul-1

6

Jan-17

Jul-1

7

Jan-18

Jul-1

8

Jan-19

Jul-1

9

South Korea

10y real rate SK-US 10y real rate gap

%

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Jan-12

Jul-1

2

Jan-13

Jul-1

3

Jan-14

Jul-1

4

Jan-15

Jul-1

5

Jan-16

Jul-1

6

Jan-17

Jul-1

7

Jan-18

Jul-1

8

Jan-19

Jul-1

9

Taiwan

10y real rate TW-US 10y real rate gap

%

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jan-12

Jul-1

2

Jan-13

Jul-1

3

Jan-14

Jul-1

4

Jan-15

Jul-1

5

Jan-16

Jul-1

6

Jan-17

Jul-1

7

Jan-18

Jul-1

8

Jan-19

Jul-1

9

Indonesia

10y real rate ID-US 10y real rate gap

%

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Jul-16

Jan-17

Jul-17

Jan-18

Jul-18

Jan-19

Jul-19

India

10y real rate IN-US 10y real rate gap

%

-1.5

-0.5

0.5

1.5

2.5

3.5

Jan-12

Jul-1

2

Jan-13

Jul-1

3

Jan-14

Jul-1

4

Jan-15

Jul-1

5

Jan-16

Jul-1

6

Jan-17

Jul-1

7

Jan-18

Jul-1

8

Jan-19

Jul-1

9

Thailand

10y real rate TH-US 10y real rate gap

%

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Jan-12

Jul-1

2

Jan-13

Jul-1

3

Jan-14

Jul-1

4

Jan-15

Jul-1

5

Jan-16

Jul-1

6

Jan-17

Jul-1

7

Jan-18

Jul-1

8

Jan-19

Jul-1

9

Singapore

10y real rate SG-US 10y real rate gap

%

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan-12

Jul-1

2

Jan-13

Jul-1

3

Jan-14

Jul-1

4

Jan-15

Jul-1

5

Jan-16

Jul-1

6

Jan-17

Jul-1

7

Jan-18

Jul-1

8

Jan-19

Jul-1

9

Malaysia

10y real rate MY-US 10y real rate gap

%


Real rates easing too slowly?

• Real 10y yields in South Asia have eased off highs, but remains relatively

elevated if squared with the current economic environment and prognosis.

• We expect Asian central banks to embrace more rate cuts in 2H 2019.

18

No bottom in sight for Asian govie yields

3.00

3.20

3.40

3.60

3.80

4.00

4.20

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

%

CN

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

3.00

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

%

SK

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

%

TW

1.90

2.10

2.30

2.50

2.70

2.90

3.10

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

%

TH

6.00

6.50

7.00

7.50

8.00

8.50

9.00

9.50

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

%

ID

3.50

3.60

3.70

3.80

3.90

4.00

4.10

4.20

4.30

4.40

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

%

MY

• Expect Asian yields to track core global yield curves lower.

Source: Bloomberg

Basic balance on the mend in South Asia

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

-10000

-5000

0

5000

10000

15000

20000

25000

30000

35000

40000

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

Jan-1

9

Thailand

Basic Balance (RS 12) THB NEER (RHS, %yoy)

USD mn %

-25

-20

-15

-10

-5

0

5

10

15

20

25

-15000

-10000

-5000

0

5000

10000

15000

20000

25000

30000

35000

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

Jan-1

9

Indonesia

BB: RS4 IDR NEER (yoy%)

-20

-15

-10

-5

0

5

10

15

-50000

-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

50000

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

Jan-1

9India

BB (RS 4) INR NEER (yoy%)

-12

-10

-8

-6

-4

-2

0

2

4

6

8

-60000

-40000

-20000

0

20000

40000

60000

80000

100000

120000

140000

160000

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

Jan-1

9

Malaysia

Basic Balance MYR NEER (yoy%)

• Basic balance is on the mend in India and Indonesia, providing mechanical

support for the INR and IDR on an NEER basis. Meanwhile, basic balance

accumulation is slowing down in Thailand.

Source: CEIC, OCBC

20

Foreign reserve accumulation

• In line with the basic balance picture, foreign reserve accumulation has been

positive in Asia – providing implicit buffer for the Asian currencies, barring an

acute onset of risk aversion.

• Ongoing THB outperformance relative to KRW on this metric.

SK

TW

IN

PH

THID

MY

CN

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

-2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

To

tal

rtn

6M

%

Foreign reserves: 6m % chng

SK

TW

IN

PH

TH

ID

MYCN

-6

-4

-2

0

2

4

6

-5.0 0.0 5.0 10.0 15.0

NE

ER

6M

%

Foreign reserves: 6M % chng

Source: CEIC, OCBC

21


No drastic misalignment for Asian FX

• The tightening impact of the THB NEER may compel the Bank of Thailand to

adopt a more dovish slant in due course. Meanwhile, the declining KRW NEER

has done little to support Korean exports, and should not be a serious

impediment for rate cuts at the Bank of Korea. Nevertheless, given the gentle

trajectory in their previous rate hike cycles, these two central banks may have

limited room for cuts.

• Overall, expect Asian central banks to be cognizant of externally-induced

volatility, and proceed with monetary easing with care.

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

KRW TWD MYR CNY PHP SGD INR IDR THB

%

Year-to-date NEER performance

5-Jul-19

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

KRW INR TWD IDR MYR PHP THB CNY SGD

%

NEER: Relative to 5y average

Jul-19 end-2018

22

RMB: Asymmetric risks

• The reality and materialization of Sino-US trade tensions have resulted in a

softening profile for the CFETS RMB Index.

• Although USD-CNY fixings may be restrained (significantly lower than expected)

in times of volatility (especially USD strength), a structurally softer CFETS RMB

Index implies restrained downside for USD-CNY but potentially increased

headroom on the upside if the DXY bounces higher.

6.00

6.10

6.20

6.30

6.40

6.50

6.60

6.70

6.80

6.90

7.0088

90

92

94

96

98

100

102

104

106

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

CFETS NEER vs. USD-CNY mid-point

CFETS RMB Index USD-CNY Fix (RHS)

Reversescale

-13.0-12.0-11.0-10.0-9.0-8.0-7.0-6.0-5.0-4.0-3.0-2.0-1.00.01.02.03.04.05.0

-7

-5

-3

-1

1

3

5

7

9

11

13

Nov-1

5

Ma

y-16

Nov-1

6

Ma

y-17

Nov-1

7

Ma

y-18

Nov-1

8

Ma

y-19

Nov-1

9

12m MA % yoy lead 6

12mma % yoy

CNY NEER Foreign Reserves


23

Long term structural impediments for Asia

• The soft macro backdrop portends further weakening for the Asian currencies

on a structural basis, despite background support from the positive risk

environment. In the near term, expect the Asian currencies to be also held

hostage by the lack of an appreciation impetus in the RMB.


-15

-10

-5

0

5

10

15

20-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan-10

Jul-1

0

Jan-11

Jul-1

1

Jan-12

Jul-1

2

Jan-13

Jul-1

3

Jan-14

Jul-1

4

Jan-15

Jul-1

5

Jan-16

Jul-1

6

Jan-17

Jul-1

7

Jan-18

Jul-1

8

Jan-19

% yoy

Asian (ex-China) export growth Z-score ACI

Stronger USD

Weaker USD90

95

100

105

110

115

120

125-150

-100

-50

0

50

100

150

Au

g-0

8

Fe

b-0

9

Au

g-0

9

Fe

b-1

0

Au

g-1

0

Fe

b-1

1

Au

g-1

1

Fe

b-1

2

Au

g-1

2

Fe

b-1

3

Au

g-1

3

Fe

b-1

4

Au

g-1

4

Fe

b-1

5

Au

g-1

5

Fe

b-1

6

Au

g-1

6

Fe

b-1

7

Au

g-1

7

Fe

b-1

8

Au

g-1

8

Fe

b-1

9

12M MSI ACI (RHS)

Weaker USD

Stronger USD

+ve surprises

-ve surprises 90

95

100

105

110

115

120

Ma

r-0

5

Ma

r-0

6

Ma

r-0

7

Ma

r-0

8

Ma

r-0

9

Ma

r-1

0

Ma

r-1

1

Ma

r-1

2

Ma

r-1

3

Ma

r-1

4

Ma

r-1

5

Ma

r-1

6

Ma

r-1

7

Ma

r-1

8

Ma

r-1

9

Asian Currency Index

Actual Predicted

Weaker Asian FX

Stronger Asian FX

24

Selected near term positives from flow picture

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

-25000

-20000

-15000

-10000

-5000

0

5000

10000

15000

20000

25000

30000

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

Jan-1

9

% mom (12wk ma)

12wk RS, USD mn

Stocks Bonds ACI

Stronger Asian FX

Weaker Asian FX

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Dec-1

1

Apr-

12

Aug

-12

Dec-1

2

Apr-

13

Aug

-13

Dec-1

3

Apr-

14

Aug

-14

Dec-1

4

Apr-

15

Aug

-15

Dec-1

5

Apr-

16

Aug

-16

Dec-1

6

Apr-

17

Aug

-17

Dec-1

7

Apr-

18

Aug

-18

Dec-1

8

Apr-

19

Total Net Flows (60D RS) ACI (RHS)

z-score4wk MA

3m%Stronger Asia FX

Weaker Asia FX

• Lower (and some negative) core global yields are supportive for Asian govie

bonds. Moving forward, expect selected Asian bonds and FX to continue

outperforming, with the focus on either the high-yielders and/or bond markets

presided by central banks expected to ease further.

Source: CEIC, EPFR, OCBC

25

Asian flow environment: Country perspective

3.85

3.90

3.95

4.00

4.05

4.10

4.15

4.20

4.25-1800

-1500

-1200

-900

-600

-300

0

300

600

900

Jan-

18

Ap

r-1

8

Jul-1

8

Oct

-18

Jan-

19

Ap

r-1

9

Jul-1

9

Malaysia

Equity 20D RS USD-MYR

30.5

31.0

31.5

32.0

32.5

33.0

33.5

-1500

-1000

-500

0

500

1000

1500

2000

2500

Dec

-17

Mar

-18

Jun

-18

Sep

-18

Dec

-18

Mar

-19

Jun

-19

Thailand

Net bond & equity WTD RS20 USD-THB

13100

13600

14100

14600

15100

-7000

-5000

-3000

-1000

1000

3000

5000

7000

Dec

-17

Mar

-18

Jun-

18

Sep

-18

Dec

-18

Mar

-19

Jun-

19

Indonesia

Bond & Equity: 20D RS USD-IDR

62.00

64.00

66.00

68.00

70.00

72.00

74.00

76.00-6000

-4000

-2000

0

2000

4000

6000

8000

10000

Dec

-17

Mar

-18

Jun-

18

Sep

-18

Dec

-18

Mar

-19

Jun-

19

India

NFB: Bond & Eq RS 20D USD-INR

29.0

29.5

30.0

30.5

31.0

31.5

-6000

-5000

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

Dec

-17

Mar

-18

Jun-

18

Sep

-18

Dec

-18

Mar

-19

Jun-

19

Taiwan

NFB: 20d RS USD-TWD

1045

1065

1085

1105

1125

1145

1165

1185

-2000

0

2000

4000

6000

8000

10000

Dec

-17

Mar

-18

Jun

-18

Sep

-18

Dec

-18

Mar

-19

Jun

-19

South Korea

NFB: Bond & Eq 20D RS USD-KRW

• South Korea, Thailand and Indonesia looking solid on the back of bond inflows,

although the follow-through to FX is limited for KRW.

Source: CEIC, OCBC

26

Overall risk appetite recovering

• Going forward, with no blow-up in Sino-US trade talks for now and a liquidity

boost from global central banks, we may expect a broadly risk-on environment –

supportive of Asian FX.

• In Asia, short-end (realized) EM FX vols have also eased, supporting the

vol/carry proposition with respect to EM/Asian assets.

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan-12

Jul-1

2

Jan-13

Jul-1

3

Jan-14

Jul-1

4

Jan-15

Jul-1

5

Jan-16

Jul-1

6

Jan-17

Jul-1

7

Jan-18

Jul-1

8

Jan-19

Jul-1

9

FX Sentiment Index

RISK OFF

RISK ON-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Apr-0

5

Apr-0

6

Apr-0

7

Apr-0

8

Apr-0

9

Apr-1

0

Ap

r-1

1

Apr-1

2

Apr-1

3

Apr-1

4

Apr-1

5

Ap

r-1

6

Apr-1

7

Apr-1

8

Apr-1

9

Z-score

EM 1M vols

96

98

100

102

104

106

108

110

30

DE

C2

01

6

02

FE

B2

01

7

08

MA

R2

01

7

11

AP

R2

01

7

15

MA

Y2

01

7

16

JUN

20

17

20

JUL2

01

7

23

AU

G2

01

7

26

SE

P2

01

7

30

OC

T2

01

7

01

DE

C2

01

7

04

JAN

20

18

07

FE

B2

01

8

13

MA

R2

01

8

16

AP

R2

01

8

18

MA

Y2

01

8

21

JUN

20

18

25

JUL2

01

8

28

AU

G2

01

8

01

OC

T2

01

8

02

NO

V2

01

8

06

DE

C2

01

8

09

JAN

20

19

12

FE

B2

01

9

18

MA

R2

01

9

19

AP

R2

01

9

23

MA

Y2

01

9

26

JUN

20

19

30/12/16=100

EM FX Carry Basket


27

SGD NEER: Biased lower on soft macro outlook


116

117

118

119

120

121

122

123

124

125

126

127

128

129

14

-Oct-

13

14

-Dec-1

3

14

-Fe

b-1

4

14

-Ap

r-1

4

14

-Jun

-14

14

-Au

g-1

4

14

-Oct-

14

14

-Dec-1

4

14

-Fe

b-1

5

14

-Ap

r-1

5

14

-Jun

-15

14

-Au

g-1

5

14

-Oct-

15

14

-Dec-1

5

14

-Fe

b-1

6

14

-Ap

r-1

6

14

-Jun

-16

14

-Au

g-1

6

14

-Oct-

16

14

-Dec-1

6

14

-Fe

b-1

7

14

-Ap

r-1

7

14

-Jun

-17

14

-Au

g-1

7

14

-Oct-

17

14

-Dec-1

7

14

-Fe

b-1

8

14

-Ap

r-1

8

14

-Jun

-18

14

-Au

g-1

8

14

-Oct-

18

14

-Dec-1

8

14

-Fe

b-1

9

14

-Ap

r-1

9

14

-Jun

-19

14

-Au

g-1

9

2.0%pa+/-2.0% band

flatten slope

neutral slope

1.0%pa+/-2.0% band

flatten slope

0.5%pa+/-2.0%

band

0.0%pa+/-2.0% band

0.5%pa+/-2.0%

band

steepen slope

1.0%pa+/-2.0%

band

steepen slope

-0.1500

-0.1000

-0.0500

0.0000

0.0500

0.1000

0.1500

0.2000

Year-to-date 2019

INR

PHP

AUD

IDR

KRW

GBP

CNY

THB

TWD

JPY

MYR

EUR

USD

SGD strengthens agst currency x

SGD w eakens agst currency x

• Recent developments perhaps suggests that the growth outlook is somewhat

worse than the “slightly below potential” prognosis in the April MPS.

• The NEER may be increasingly perceived to be elevated relative to underlying

fundamentals.

28

FX forecasts (correct as of 01 July)

Source: OCBC

Spot Jul-19 Sep-19 Dec-19 Mar-20

USD-JPY 108.27 108.91 107.15 106.84 106.52

EUR-USD 1.1325 1.1325 1.1224 1.1352 1.1479

GBP-USD 1.264 1.2640 1.2461 1.2644 1.2827

AUD-USD 0.6997 0.7028 0.6909 0.7009 0.7110

NZD-USD 0.6702 0.6735 0.6597 0.6702 0.6807

USD-CAD 1.3105 1.3017 1.2914 1.2862 1.2811

USD-CHF 0.9836 0.9803 0.9739 0.9712 0.9685

USD-SGD 1.3548 1.3492 1.3548 1.3484 1.3421

USD-CNY 6.8456 6.8258 6.8849 6.8075 6.7300

USD-THB 30.59 30.37 30.21 30.10 29.98

USD-IDR 14113 13,986 13,903 13,832 13,760

USD-MYR 4.1385 4.1202 4.1214 4.0944 4.0674

USD-KRW 1158.70 1146.44 1139.99 1134.07 1128.15

USD-TWD 30.995 30.832 30.745 30.581 30.417

USD-HKD 7.8085 7.8000 7.7950 7.7850 7.7750

USD-PHP 51.05 50.78 50.65 50.48 50.31

USD-INR 69.06 68.52 68.06 67.62 67.17

EUR-JPY 122.61 123.34 120.27 121.28 122.27

EUR-GBP 0.8960 0.8960 0.9008 0.8978 0.8949

EUR-CHF 1.1140 1.1101 1.0931 1.1024 1.1117

EUR-SGD 1.5343 1.5280 1.5207 1.5307 1.5405

GBP-SGD 1.7125 1.7054 1.6882 1.7050 1.7215

AUD-SGD 0.9480 0.9482 0.9360 0.9452 0.9542

NZD-SGD 0.9081 0.9087 0.8938 0.9037 0.9135

CHF-SGD 1.3773 1.3764 1.3911 1.3885 1.3858

JPY-SGD 1.2514 1.2388 1.2644 1.2622 1.2599

SGD-MYR 3.0532 3.0538 3.0420 3.0364 3.0307

SGD-CNY 5.0522 5.0592 5.0819 5.0484 5.0146

29

USD rates forecasts (correct as of 02 July)

Source: OCBC

3Q19 4Q19 1Q20 2Q20 3Q20 4Q20

Fed Funds Target Rate 1.75%-2.0% 1.50%-1.75% 1.50%-1.75% 1.50%-1.75% 1.50%-1.75% 1.50%-1.75%

1-month LIBOR 2.15% 1.90% 1.84% 1.78% 1.71% 1.65%

2-month LIBOR 2.20% 1.95% 1.89% 1.83% 1.76% 1.70%

3-month LIBOR 2.25% 2.00% 1.94% 1.88% 1.81% 1.75%

6-month LIBOR 2.26% 2.10% 2.04% 1.98% 1.91% 1.85%

12-month LIBOR 2.27% 2.20% 2.15% 2.10% 2.05% 2.00%

1-year swap rate 2.00% 1.95% 1.98% 2.00% 2.03% 2.05%

2-year swap rate 1.80% 1.75% 1.84% 1.93% 2.01% 2.10%

3-year swap rate 1.73% 1.69% 1.81% 1.92% 2.04% 2.15%

5-year swap rate 1.75% 1.70% 1.83% 1.95% 2.08% 2.20%

10-year swap rate 1.95% 1.90% 2.01% 2.13% 2.24% 2.35%

15-year swap rate 2.10% 2.00% 2.10% 2.21% 2.31% 2.41%

20-year swap rate 2.19% 2.16% 2.24% 2.32% 2.40% 2.48%

30-year swap rate 2.20% 2.18% 2.29% 2.39% 2.50% 2.60%

30

SGD rates forecasts (correct as of 02 July)

Source: OCBC

3Q19 4Q19 1Q20 2Q20 3Q20 4Q20

1-month SIBOR 1.85% 1.83% 1.85% 1.87% 1.88% 1.90%

1-month SOR 1.80% 1.75% 1.81% 1.88% 1.94% 2.00%

3-month SIBOR 2.00% 1.98% 2.00% 2.02% 2.03% 2.05%

3-month SOR 1.83% 1.80% 1.88% 1.97% 2.05% 2.13%

6-month SIBOR 2.06% 2.05% 2.08% 2.10% 2.13% 2.15%

6-month SOR 1.70% 1.65% 1.78% 1.92% 2.05% 2.18%

12-month SIBOR 2.18% 2.15% 2.17% 2.19% 2.20% 2.22%

1-year swap rate 1.70% 1.65% 1.71% 1.78% 1.84% 1.90%

2-year swap rate 1.63% 1.60% 1.65% 1.70% 1.75% 1.80%

3-year swap rate 1.65% 1.63% 1.68% 1.73% 1.77% 1.82%

5-year swap rate 1.72% 1.70% 1.74% 1.78% 1.81% 1.85%

10-year swap rate 1.95% 1.90% 1.94% 1.98% 2.02% 2.06%

15-year swap rate 1.98% 1.94% 2.01% 2.09% 2.17% 2.25%

20-year swap rate 2.28% 2.26% 2.27% 2.29% 2.30% 2.31%

30-year swap rate 2.29% 2.28% 2.29% 2.31% 2.32% 2.33%

Thank You

31

global markets outlook 2h 2019 - ocbc

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