USD still range-bound; Surprise RBI hold hits govvies

USD still stuck in range. Gradual flattening ahead for the India govvie curve.
Philip Wee, Eugene Leow06 Dec 2019
    Photo credit: AFP Photo

    FX: USD is still range-bound

    The US dollar started December on a weak note but there was no panic selling. The USD index (DXY) has fallen 0.9% since end-November, driven by some weak US data and China-US trade deal doubts. Yet, the US bond market does not seem to be in a hurry to contest the Fed’s rate pause stance. After the third cut in the Fed Funds Rate to 1.75% on October 30, the 2Y and 10Y treasury yield has been stabilizing around 1.60% and 1.80% respectively.

    Tonight’s US monthly jobs report could lead to profit-taking ahead of the weekend, in our view. Despite slower ADP employment and employment sub-indices in the ISM reports, consensus expects nonfarm payrolls to come in at 183k in November from 128k in the previous month. Overall, these developments are unlikely to be enough to prevent the Fed from standing pat at its FOMC meeting on December 11 and keeping its rate pause stance. DXY has been holding a range pivoted around 98 after the Fed’s second rate cut in September.

    Rates: Surprise RBI hold hits govvies

    The Reserve Bank of India’s (RBI) unanimous rate hold took the market by surprise. Gilts sold off, led by a 21bps increase in the 5Y tenor. The macro mix for India has deteriorated further lately, with the RBI revising FY 2019/20 growth down to 5.0% (6.1% previously) while bringing its CPI forecasts for H2 FY2019/20 up to 5.1% (4.7% previously). There appears to be a bit more concern on rising food prices and inflation expectations. We would also note that the RBI pause appears broadly in line with what major central banks across the world (in the including the Fed) has been communicating.

    We think that the RBI will retain a dovish bias, but the emphasis may now switch towards ensuring that the aggressive rate cuts this year (cumulative 135bps) gets transmitted to commercial lending rates. On the rates space, the Gilt curve was already steep heading into the RBI meeting. The rate pause actually led to bear flattening with the 2Y/10Y spread narrowing by 9bps to 102bps. Steepening pressures may give way to gradual flattening pressures. While short-term INR yields (<1Y) are likely to stay anchored, downside to yields look limited. Instead, the narrative is likely to shift towards lowering long-term borrowing costs. There are a few ways to do this – outright buying of securities, doing a Twist (selling short term securities while simultaneously buying longer term ones) or keeping liquidity flush. If the RBI starts to lean in this direction, extending duration would be more attractive.

    Philip Wee

    FX Strategist - G3 & Asia


    Eugene Leow

    Rates Strategist - G3 & Asia

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