HALISTER1: Asian Bonds, Currencies Fall on Concern Fed Hike May End Rally

Asian Bonds, Currencies Fall on Concern Fed Hike May End Rally

(Bloomberg) -- Asian govt bonds and currencies drop on renewed concerns that a Fed rate increase as early as Sept. this year may put an end to the rally in emerging market assets.
  • Analysts expect Asian bonds and currencies to stay under pressure in the coming sessions
  • Indonesia’s 10-year yield climbs 7 bps to 7.132% and Thailand’s equivalent rate rises 6 bps to 2.227%; South Korea’s 10-year rate up 2 bps to 1.446% and China’s increases 4 bps to 2.775%
  • In Japan, 40-year yield increases 3 bps to 0.435%
  • Fed funds futures showed 42% chance of a rate hike in Sept. on Friday vs 22% a week earlier, and 65% chance for Dec. compared with 51%
  • South Korea’s won lead declines among Asian currencies with 1% decline, followed by Malaysia ringgit’s 0.7% drop and Indonesia rupiah’s 0.5% slide; Taiwan dollar weakens 0.4%
  • NOTE: Fed Chair Yellen said Friday the case to raise rates is strengthening as economy approaches the central bank’s goals
  • DBS (Eugene Leow, fixed-income strategist)
    • Traders and investors are refocusing on chances of Fed tightening, and the rally in Asian govt bonds is likely to stall
    • There is “tremendous uncertainty” over where UST yields would settle in the run-up to Sept. meeting, weighing on Asian EM bonds
    • In addition, stronger USD is likely to act as headwind for carry trades that have supported Asian govt bonds
  • Standard Chartered (Nagaraj Kulkarni, senior Asia rates strategist)
    • Weakness in Treasuries is spilling over to Asian local market and is likely to continue if the employment data in U.S. this week comes out strong
    • U.S. Aug. nonfarm payrolls due Sept. 2; est. 180k vs prev. 255k
  • Mitsubishi UFJ Kokusai Asset Management (Hideo Shimomura, chief fund investor)
    • There is now a growing chance for a Fed rate increase in September and pressure is on short-term UST yields to rise
    • Fed officials probably think it’s necessary to boost market speculation about a rate hike
    • Shimomura said a meeting he had with Fed officials last month showed they are concerned over the flat U.S. yield curve, excessive risk taking by investors and the negative impact of curve flattening on banks’ revenues
    • Highly likely Fed will maintain hawkish bias, which would be negative for EM assets in the short-term
  • IMPACT ON ASIAN CURRENCIES
  • Scotiabank
    • USD is expected to advance against emerging currencies in Asia early this week, according to a note from the bank
    • USD/KRW and USD/MYR could rise at a relatively faster pace compared to regional peers, heading for 1,150 and 4.10 level respectively in coming sessions
    • Gap between onshore and offshore dollar/yuan may widen
    • BOJ Governor Kuroda reiterated on Friday he won’t hesitate to boost monetary stimulus if needed; may exert depreciation pressure on JPY for a while and subsequently weaken KRW and TWD
  • Shinkin Asset Management (Jun Kato, senior fund manager)
    • If BOJ stays on hold in Sept., USD/JPY may drop temporarily to as low as 98 before rebounding to 100-105 on expected BOJ easing and speculation of Fed rate hike in Dec.
    • Pair could briefly hit 107.50 but strong bias unlikely to sustain unless traders and investors begin to speculate the Fed will deliver series of rate increase, such as once every quarter
    • USD/JPY strengthens 0.5% to 102.23, extending 1.3% gain on Friday
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Eugene Leow (DBS Group Holdings Ltd)
Hideo Shimomura (Mitsubishi UFJ Financial Group Inc)
Jun Kato (Shinkin Central Bank)
Nagaraj Kulkarni (Standard Chartered PLC)

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