Daily BriefsMacro

Macro: Asia Pacific Growth Outlook: Critical to Boost Consumer Spending as US Fiscal Stimulus Fades in 2022 and more

In today’s briefing:

  • Asia Pacific Growth Outlook: Critical to Boost Consumer Spending as US Fiscal Stimulus Fades in 2022
  • Rates 10y Dashboard: Which Countries Are Most and Least Correlated with the US?
  • Crunch Time for Singapore Dollar and Renminbi
  • FX Dashboard: Israeli Shekel Finally Starts Getting Cheaper

Asia Pacific Growth Outlook: Critical to Boost Consumer Spending as US Fiscal Stimulus Fades in 2022

By Said Desaque

Asia’s continued reliance on net exports makes it impossible for the region to assume a leadership role in the global economy. Differing cross-border rates of COVID-19 vaccine rollouts mean the timing of herd immunity will differ, thereby implying a multi-speed global recovery across regions.

Given its structure, significant fiscal stimulus in the US can provide short-term economic growth impetus to the Asia Pacific region, but sustainable recovery will require greater contributions from domestic demand. The speed and success of vaccine rollouts will determine the timing of a credible and sustained recovery in service sector consumer spending in the region.

The lack of Western-style income safety nets in Asia during the pandemic contributed to cautious household spending. Weak service sector hiring in China has produced a high level of precautionary saving amongst workers who were laid-off last year, thereby highlighting the usefulness of safety nets and the need to accelerate vaccine rollouts.

While Asia Pacific countries cannot replicate the massive easing of fiscal policy in the US, settings are unlikely to change insofar as to adversely impact aggregate demand, while central banks will henceforth be expected to do the bulk of the heavy lifting to support growth. Central banks will not contemplate altering their policy settings before the Fed changes its course, while rising US Treasury yields will raise capital flight and devaluation risks for the region.

Downside risks for the Asia Pacific region include slow vaccine rollouts and herd immunity, as well as lack of improvement in bilateral relations between the US and China. Potential upside forces for the region are largely exogenous and unpredictable, thereby making placing big bets on a blow-out economic recovery for the region difficult to justify.    


Rates 10y Dashboard: Which Countries Are Most and Least Correlated with the US?

By Gautam Jain, PhD, CFA

We go over the correlation of 10y rates in EM countries with the US 10y to identify those that are the best if the sell-off in US rates resume and those that stand to benefit from a lull.

The attached file is a snapshot of EM 10y rates market, which we produce daily, and where we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to the broad market.


Crunch Time for Singapore Dollar and Renminbi

By Olivier Desbarres

We estimate that the USD-value of central bank FX reserves – adjusted for currency-valuation effects – in China, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand rose by about $342bn (1.5% of GDP) between end-March 2020 and end-February 2021 (see Non-Japan Asia: NEERs and FX intervention, 26th March 2021).

The increase, which ranged from 0.3% of GDP in China to nearly 28% of GDP in Singapore, was partly the result of central banks buying foreign currency in the FX market. At the very least NJA central banks’ FX intervention capped the pace of appreciation (CNY, KRW, IDR, THB and TWD) or contributed to (modest) NEER depreciation (INR, MYR, PHP), in our view.

Of course the matrix of exchange rate policy AND balance of payment flows, and their underlying drivers, is key to past and future currency performance.

In the past 12 months the MAS has kept the Singapore Dollar NEER within a very narrow range of about 1.2%, effectively neutralising Singapore’s significant current account surplus, to support the critical external sector and ultimately reflate the economy.

However, the Singapore Dollar NEER’s recent rally and jump in Singapore CPI-inflation in February arguably complicate the currency’ near-term outlook.

Along with consensus, we forecast that the MAS will leave the parameters – (zero) slope, width and central rate – of the Singapore Dollar NEER band unchanged at its forthcoming semi-annual policy meeting. We think the NEER could dip temporarily before rebounding.

The People’s Bank of China has allowed large external trade surpluses and capital account inflows into China to push the Chinese Renminbi NEER to a 270-week high.

But the Renminbi is showing some signs of altitude sickness. The pace of monthly appreciation has halved recently and the PBoC has fixed USD/CNY higher in 6 of the past 7 sessions. Importantly CPI-inflation remains stuck at the bottom of its five-year ranges.

In this context, we think the risk is biased towards the PBoC more actively negating FX inflows into China and towards modest Renminbi NEER downside near-term.


FX Dashboard: Israeli Shekel Finally Starts Getting Cheaper

By Gautam Jain, PhD, CFA

In this note, we go over the factors driving the Israeli shekel currently and explain the reasoning behind our constructive view on the currency.

The attached file is a snapshot of EM currency market, which we produce daily, and where we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to the broad market.


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