What is Happening In Global Flows
US Treasuries and USD
“Custody holdings are falling at the Fed and, while the impact is not so clear for the USD, it’s negative treasuries….the securities held in custody for foreign official and international accounts, which foreign central banks make up a large share of the deposits….
There exists a 40% correlation between Foreign EM central bank reserve accumulation and official demand for UST….Falling reserve growth and intervention explains a large share of the selling. While the movements are not what we would term ‘highly’ correlated, they are not zero either. What this means is Central banks are placing a premium on USD cash in hand over the paper in US.” Taken from Citibank Strategy
Near term support to be found in the FOMC on 30-31 Jul and the possibility of a dovish outcome which could support fixed income prices for the time being.
“Yesterday, the $ was hit as influential journalist Hilsenrath said the Fed was likely to consider refining its forward guidance in an effort to signal rates will stay lower for longer.” Taken from HSBC Bank USA
Traders remain dismissive of this view which could be the pain trade on the street next week.
Bearish MYR medium term – Deutsche Bank
“USD/MYR has significantly lagged the pullback in the rest of USD/Asia, with spot still trading near June highs. Importantly, this is also a long-standing resistance level from which spot has historically fast retraced lower. However, we believe conditions are ripe for a breakout in spot above this familiar range in the coming weeks.
There are five reasons to remain bearish on the ringgit;
* Malaysia has seen the biggest reduction in current account surplus anywhere in Asia
* Shopping abroad is pinching the BoP purse
* The similarities to AUD – in terms of bond market characteristics, leverage to China, and FX overvaluation – give reason to be cautious
* The real fallout from bond market vulnerability is still likely pending
* Policy makers could be cornered into allowing currency weakness”
Next week’s big line-up : US GDP, the FOMC, ECB, BoE, NFP, and month-end flows
Could we ask for more ?
ECB and BOE pretty much foregone conclusions.
Month end flows to favour USD selling for the short term.
The FOMC is the key and the expectation of more forward guidance could be the nail in the coffin.
“As the July 30-31 FOMC meeting approaches, currency
markets are behaving as if the June 19 one barely happened.
Following a late-June surge, the trade-weighted dollar is
unchanged over the past six weeks; benchmark currencies
like NZD, MXN, KRW and ZAR are 2% to 5% higher; and
FX volatility is a point lower (from 10.5% to 9.5% on VXY
Global). Treasury yields are 20bp higher, but every spread
product except EM local currency debt now trades tighter
than in mid-June.”
“Xinhua reported on Tuesday that Premier Li Keqiang’s government sees 7 percent growth as the bottom line for tolerance of an economic slowdown, signalling the nation will act to support expansion if needed. On Thursday policy makers announced a mini stimulus plan with the State Council temporarily scrapped all VAT and operating taxes on small business. The government has also pledged to improve the approval procedures for export companies and said that they’re going to open more financing channels for the railways. They will also speed up the building of railways in the mid-western provinces and SAFE announced that starting from 1 September for FX exchange of less than USD$50K will not need government approval and instead can be traded directly.”
Reports are starting to advocate a rally in SHCOMP based on technicals and squeezing out the market shorts.