OCBC TREASURY RESEARCH
Daily Market Outlook
19 May 2021
Treasury Research & Strategy 1
FX Themes/Strategy
• US April housing starts entered weaker than expected. US equities weakened at close. Overall market sentiment remains positive as seen from the FX Sentiment Index (FXSI) still being within the Risk-On zone.
However, there is some evidence of a slight pull-back in optimism in recent sessions.
• The USD weakened across the board, with the European complex and the NZD outperforming. The EUR broke through and stayed above the 1.2200 level, leaving the Feb high at 1.2243 somewhat vulnerable. The JPY and AUD still holding on near key levels at 109.00 and 0.7800.
• There has been a lot of focus on US data misses and dovish Fed – the latest being the miss in housing starts and the comments from Kaplan / Bostic – in the recent run lower for broad USD. Another element worth considering is the risk-on / weak-USD dynamic. Putting aside the day-to-day choppiness, the FXSI has been moving in the Risk-On direction since April. Going forward, overall market sentiment may be further supported by reopenings in Europe and the US, with the pandemic resurgence in parts of Asia seen more as a regional event.
What is preventing this dynamic from coming through more strongly is perhaps US equities still looking sideways for now. A return to an uptrend for US equities may present the USD with another leg lower.
• The DXY index is barely clinging on to the Feb low around 89.70 – the bias is now clearly towards the Jan low near 89.20. Near term, the preferred negative-USD play is a higher EUR-USD. The AUD has been a laggard thus far. We look for it to catch up if there is more evidence of upside momentum in the equities space.
• USD-Asia: USD-Asia likely range-bound given the diverging influences of the weak USD and the domestic pandemic concerns. Nevertheless, the likes of the TWD seems to be weathering the pandemic issues well.
USD-CNH, as well, remains biased lower.
• USD-SGD: The SGD NEER firmed up to +0.56% above the perceived parity (1.3379) this morning. The USD-SGD clinging on to the 1.3300 locus amid USD weakness. Beyond the immediate term, expect the USD-SGD to be mostly sideways within a broad 1.3250 and 1.3350 range. Prefer to buy dips towards 1.3250.
Frances Cheung, CFA Rates Strategist +65 6530 5949 [email protected]
Terence Wu FX Strategist +65 6530 4367 [email protected]
Treasury Research Tel: 6530-8384
OCBC TREASURY RESEARCH
Daily Market Outlook
19 May 2021
Treasury Research & Strategy 2
EUR-USD
Positive. Yet another US data miss and round of dovish Fedspeak was sufficient to take the EUR-USD beyond the 1.2200 resistance. So long as the pair stays above that level, the Feb high at 1.2243 remains vulnerable in the near term. Beyond that, we will need the reopenings in Europe to translate into more concrete data outperformance for the EUR to reach new highs.
1.00 1.05 1.10 1.15 1.20 1.25
May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21
Actual Fitted
USD-JPY
Still positive for now. Slight reversal of risk-on bias depresses the USD- JPY. However, a lack of traction below 109.00 should give remnant USD-JPY bulls some hope. More critical supports at 108.30/50 for now.
The pair will need back-end UST yields to show a stronger uptrend for it to return to a strong upside bias.
101 103 105 107 109 111 113
May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21
Actual Fitted
AUD-USD
Still within range. 0.7800/20 came in again to halt the AUD-USD advance. Limited domestic positives for now, perhaps contributing to the lagging reaction in the AUD to the recent USD declines. Positives are mainly from USD-centric weakness. A breach of 0.7800/20 will see the pair retest 0.7890/00 recent highs.
0.55 0.60 0.65 0.70 0.75 0.80
May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21
Actual Fitted
GBP-USD
Positive. The sentiment surrounding the UK remains positive, with the GBP-USD responding by flexing against the 1.4200 resistance. That would be the next waypoint before the pair makes an attempt at the Feb high of 1.4237. Some signs of the pair being overbought for now (in technicals and short-term implied valuations), but that is not yet translating to downside in spot just yet. Near term support at 1.4100.
USD-CAD
Potential consolidation. The CAD underperformed overnight, with investors balking at USD-CAD levels near 1.2000. Fundamentals are still CAD supportive, but the pace of ascent may slow after significant gains year-to-date. Some consolidation higher for the USD-CAD is perhaps in order. Support/resistance levels at 1.2000 and 1.2100 for now.
OCBC TREASURY RESEARCH
Daily Market Outlook
19 May 2021
Treasury Research & Strategy 3
Rates Themes/Strategy
• USTs were traded in tight ranges on Tuesday, with yields ending the day mildly lower amid the risk-off sentiment. Bond futures are steady to a tad softer this morning ahead of the USD27bn of 20Y auction; this sector has underperformed recently with reduced Fed purchase. We continue to see the 10Y nominal yield to trade in a range of 1.55%- 1.75% with an upward bias to push real yields higher.
• The 52-week bill drew a record low yield of 0.055%, while the Fed’s o/n reverse repo operation increased to USD243.5bn, continuing to reflect the flush liquidity at the front-end. Fed fund future pricing was little changed. The April FOMC minutes are unlikely to provide further clue to the monetary outlook.
• ECB PEPP net weekly purchase rose to EUR19bn on the week ended 14 May. Still, the average weekly net purchase in this quarter so far was at EUR17bn, just similar to the run-rate required for the existing envelope to be fully utilized by March 2022. The ECB is also scheduled to review the pace of its weekly asset purchase at the June meeting.
Inflation expectation has stayed near the cyclical high, leaving real yields deeply negative – if there is any catch-up to play in nominal yields, there is arguably more room for Bunds than for USTs. That said, movement in bp terms by low-yielders is generally more timid. On balance, Bund-UST yield spreads are likely to turn stable after the recent narrowing.
• The latest plan by Thailand to increase borrowing underlines the risk amid the COVID resurgences in Asia – i.e. additional stimulus and hence the accompanying bond supply. This adds to the steepening bias in general .
Source: Bloomberg, OCBC
Source: Bloomberg, OCBC
OCBC TREASURY RESEARCH
Daily Market Outlook
19 May 2021
Treasury Research & Strategy 4
IDR:
IndoGBs moved with USD/IDR intraday, fared better in the afternoon on Tuesday upon dollar weakness. Market participants were not keen at the DNDF auction. The yield curve has steepened across the 2s10s segment over the past couple of weeks in line with our expectation.
The 10Y yield is likely to trade in a range of 6.35-6.50% in the coming weeks, with risk to the upside along with UST yields, as nominal yield differentials over USTs have become less favourable, and ahead of supply next week. Further out the curve retail demand appears to be supportive.
MYR:
The MGS curve steepened further with the 10Y underperforming. The curve is still biased to steepening amid lingering supply headwinds;
today brings the 15Y conventional auction. Meanwhile, the COVID situation may also risk additional government spending, weighing further on the supply outlook. As the curve still remains relatively flat, we hold onto our steepening view with the 3s10s segment heading towards the 90-95bp area.
SGD:
Supportive domestic liquidity is counteracting the flush USD liquidity situation, leaving forward points and front-end SGD IRS somewhat softer of late. Our base-case scenario is for front-end SGD-USD rates spreads to trade in ranges, rather than to narrow before the USD liquidity situation changes – partially hinges on a resolution to the US debt ceiling. On bond side, market awaits the announcement of the sizes of the 5Y re-opening and the 2Y mini auction. The 5Y re-opening shall not post much of a challenge, given the expected yield pick-up as the tenor is slightly longer than the current benchmark.
THB:
The government is planning an additional budget of THB700bn to fund measures helping various sectors affected by COVID and reviving the economy. While the additional spending may be more likely for the next fiscal year due to the approval process, and the financing burden can be shared among bond issuance (including retail bonds), promissory notes and loans, this nevertheless will weigh on bond market sentiment and lead to some knee-jerk reaction .
Source: Bloomberg, OCBC
Source: Bloomberg, OCBC
OCBC TREASURY RESEARCH
Daily Market Outlook
19 May 2021
Treasury Research & Strategy 5
OCBC TREASURY RESEARCH
Daily Market Outlook
19 May 2021
Treasury Research & Strategy 6
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Treasury Research & Strategy
Macro Research
Selena Ling
Head of Research & Strategy [email protected]
Tommy Xie Dongming Head of Greater China Research
Wellian Wiranto Malaysia & Indonesia [email protected]
Howie Lee Thailand, Korea &
Commodities [email protected]
Carie Li
Hong Kong & Macau [email protected]
Herbert Wong Hong Kong & Macau [email protected]
FX/Rates Strategy
Frances Cheung Rates Strategist
Terence Wu FX Strategist
Credit Research
Andrew Wong Credit Research Analyst [email protected]
Ezien Hoo
Credit Research Analyst [email protected]
Wong Hong Wei Credit Research Analyst [email protected]
Seow Zhi Qi
Credit Research Analyst [email protected]