Market Dec 2015 No2 : Indeed, it is believed that some of the depreciation
JGB yield curve flattens as BOJ extends maturity
- As announced in today's monetary policy meeting, Bank of Japan (BOJ) will extend its JGB portfolio duration and that is having its intended effect in Japanese government bond (JGB) market.
- Yen has defied weakness over Bank of Japan's (BOJ) move due to small size of the increase in additional purchase, $300 billion per annum or just about 0.375% of current purchase size. However the tweak in bond market is substantial, since the tweak change course of buying under current ¥80 trillion per annum.
- Yield curve has flattened post decision and Japanese bonds rallying.
- 10 year, Japanese government bond yield, is down close to 5%, trading at 0.28% and 5 year yield is down close to 7%. Two year yield is down -6.5% today trading at -0.03%. 30 year yield is down -2.8%, trading at 1.3%.
- While Yen and Nikkei broadly defiant over the move, party is on in bond market
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China Growth Shock to Hit Energy, Shipping, Steel Most
- Energy, shipping and steel would be the hardest-hit sectors in Asia-Pacific (APAC) in the event of a sharp slowdown in Chinese growth, says Fitch Ratings. The sector outlooks for APAC steel and energy, and global shipping, are negative even under our current forecast expectations where China slows only gradually. Asian manufacturing and technology sectors would also be significantly affected, given the scale of Chinese demand and its position in the regional supply chain.
- Fitch's core view remains that China will not experience a 'hard landing', with GDP growth forecast to slow to 6.3% and 6% in 2016 and 2017, respectively. But some risks remain of a disorderly structural rebalancing, where growth slows more quickly than forecast. Fitch has assessed the impact of a hypothetical scenario in which China's economy were to experience a rapid and substantial deceleration over a three-year period to end-2018, with shocks to both investment and consumption. Under this scenario, Chinese GDP growth would fall to an average of 2.3% per annum from 2016-2018.
- A sudden slowdown in China would act as a significant drag on global growth. APAC countries with the most extensive trade and investment connections with China would be the most exposed, and include Hong Kong, Singapore, Korea, Taiwan and Japan. Global commodity prices would stay lower for longer, and capital investment and export and trade-linked sectors would face the most significant effects on financial performance and credit profiles.
- APAC manufacturers of heavy equipment and machinery, and dry-bulk shipping companies, would suffer as Chinese demand and investment growth - and by extension, regional trade - would fall rapidly. Chemicals, ores and minerals are also among the largest categories of exports to China from the APAC region. Consumer product manufacturers such as office and telecom equipment supplies would also be exposed.
- If Chinese consumer demand growth were to fall significantly under this scenario, then domestic technology firms would also experience pressure on revenues and margins. Furthermore, the broad-based effects on global demand from China's slowdown would also weigh on regional technology firms, given China's heavily integrated position in the APAC supply chain. China imports large volumes of electronic components from the APAC region and exports finished products. If global consumer demand growth were to fall significantly, then price competition among producers would also be likely to rise.
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CNY on the path of further depreciation
- The announcement of the CFETS index not only allows China to publish its own benchmark currency index (perhaps the start of an attempt to eventually rival the USD Index), but also reinforces the view that the authorities are placing less emphasis on USDCNY movements and more on changes in the CNY relative to the country's main trading partners.
The fact that the estimate of the CFETS NEER index puts its slightly more than 1% higher compared with the end of last year, after reaching a peak of 4.07% on 8 July 2015, suggests that China is indeed attempting to maintain relative stability in the NEER by allowing USDCNY to move higher.
- Marking to events, 11 December 2015, the Chinese authorities' determination to prevent further CNY weakness appears to have waned recently, with USDCNY fixings moving consistently higher. Adhering to the new CNY NEER basket allows the authorities to avoid CNY appreciation at a time of expected broad USD appreciation. This is consistent with a rise in USDCNY.
- Indeed, it is believed that some of the depreciation in CNY/CNH recently likely reflected a degree of targeted pre-emption of general USD strength ahead of expected Fed rate hikes. Moreover, focusing on the new basket may explain limited FX intervention recently and greater tolerance for CNY spot weakness as long as it does not diverge significantly from the NEER basket.
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CBC intends to further weaken TWD and to boost export competitiveness
- Taiwan's central bank, Central Bank of Republic of China, CBC has delivered a cut in its policy rate in its monetary policy by cutting 12.5 bps, the current interest rate is 1.625%
- In the second half of this year, the central bank cut a total of 25 bps, after standing pat for four long years.
"The key motivation here is to further weaken the TWD and to boost export competitiveness. Unlike most EM economies, capital outflows is not a paramount concern for Taiwan as it has a sizeable foreign exchange reserves and a large current account surplus", opines Commerzbank.Add to Anti-Banner
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BI likely to cut 25 bps early next year
- Indonesia's central bank, Bank Indonesia kept its interest rates on hold in its monetary policy meeting at the rate of 7.5% in order to anchor IDR stability.
- Like in latest MPC statements, the central bank sees a window for easing, given that the macroeconomic stability have moderated.
"Against this backdrop, a 25bps rate cut early next year is likely as long as USD-IDR holds steady", says Commerzbank.Add to Anti-Banner
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BoJ targets 2% inflation during 2016-17
- Bank of Japan was not expected to revise its current monetary policy stand at today's meeting. The central bank also opted to continue its existing QQE program.
- The Bank has made few changes in the stimulus package, the governor announced an expansion of the average maturities of Japanese government bonds to 7-12 years from 7-10 years. Moreover, the maximum amount of real-estate investment trusts was increased, now it can buy from 5% of each issue to 10%. Kuroda believes that these stimulus package is enough reach the targeted inflation rate of 2% during 2016-17.
"Now the effects of the programme are to be expanded until the rate of inflation reaches 2%. We are curious to see when the BoJ will have to admit that this strategy failed, as it will be unable to fuel inflation. That too is likely to be an interesting subject in 2016", states Commerzbank.
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