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IGM Insights | Wednesday, 9th June 2021


  • Viewpoint - Extend and Pretend
  • Emerging FX - Seasonality in June
  • China Insight - Liquidity stays ample despite PBOC FX intervention
  • FX Majors - EUR/GBP 0.8500-0.9000 range to continue holding
  • Long term FX Majors & Rates forecasts




 

 

 

Viewpoint: Extend and Pretend 

Extend and pretend is a cynical way of describing an intermediate step adopted by many lenders when they realize that they are probably not going to get their money back. In theory, by offering easier repayment terms they hope to keep distressed borrowers current, but often it just delays the day of reckoning.

The government version of this, moral hazard, has allowed millions to avoid rent, mortgage foreclosure, and student loan payments for more than a year under various pandemic relief programs. Absolutely no one questions the good intentions of financial aid during an unprecedented global health crisis, but we are quickly approaching the uncomfortable point in time when those programs are scheduled to end.

I'm pretty confident in saying that the 'pretend' part of the relationship isn't limited to the lenders as many renters, mortgagees, and student loan borrowers have come to believe that they will somehow be absolved of past-due balances. Candidate Joe Biden actually ran on a platform of canceling student debt.

Forty million people account for $1.7 trillion in student loan debt. According to the New York Fed, a large percentage of those loans were not being repaid even before the pandemic and when the government suspended payments and interest. The clock restarts on October 1.

The federal rental eviction moratorium, which has already been extended twice but is scheduled to end on June 30, still shields about 12 million renters.

More than two million are under mortgage payment forbearance, also due to expire at the end of the month even though some banks have chosen not to enforce foreclosure until 2022.

These topics don't receive a lot of attention in the financial press but unless the Fed steps in to provide further relief, millions will face personal fiscal cliffs over the coming months as repayments are piled on top of higher living costs.

The bond market can see this coming over the horizon and might be something to keep in mind when yields shrug off another big CPI number on Thursday.

 

IGM  

 

Positive EM FX trend to persist in June?

EM currencies enjoyed a seasonally abnormal month of gains in May, thanks largely to the broadly weaker USD, the Fed's continued 'transitory inflation' rhetoric and calm US yield environment.

Seasonality for June suggests the better EM FX backdrop will continue into this month, albeit with quite divergent performances across the bloc. Signals from other asset classes are mixed, with equities usually lower, which also tends to weigh on equity inflows into EM. Commodities are mixed, with oil typically rallying further in June, while base metals weaken a touch. US yields in the 10yr don't tend to exhibit a significant trend in either direction in the month. A continued range bound environment for US yields in June of this year would be a positive for EM FX, all else equal.

Looking at performances by region, EM Asia FX tends to show generally negative returns, albeit fairly modest ones, which appears to reflect weaker equity and portfolio inflow momentum. PHP and INR are typically the worst performers. Elsewhere, CZK, HUF and BRL tend to outperformers, while CLP is a laggard. The current macro set up suggest these trends can continue in June, although these are some risks to be mindful of.

 

IGM

China Insight: Liquidity ample despite PBOC FX intervention

China Huarong became a key focus in April. It's rising default risk resulted in a downgrade of the credit. As soon as PBOC showed its concerns over the rapid pace of RMB appreciation by announcing an increase in FX deposit reserve requirement ratio from 5% to 7% on 31 May, USD/CNH successfully bounced off the year-low of 6.3520. Despite that, we think that the ongoing USD/CNH bound will not last long and that the downtrend of USD/CNH will resume once the short-covering is over. Based on what happened in 2016 when RMB kept depreciating, we think a reversal of the underlying sentiment on RMB will not happen this time round until PBOC takes more measures to show its determination to stop RMB appreciation.

In the onshore interbank funding market, liquidity basically did not react to the recent increase in FX deposit reserve requirement ratio. In our view, as long as foreign inflows into China's onshore market remains strong, any tightening in the RMB liquidity market will not be significant and sustainable. Chart 1 shows that individual/corporates' net sale of foreign currencies increased considerably during Q2-Q3 last year, in line with the appreciating RMB against the USD. During that period, we saw a sustained increase in foreign currency deposits, suggesting weakening of foreign currencies against RMB was taken by many individual/corporates' as an incentive to increase FX deposits. That being said, overall liquidity instead of tightening, turned ample. That could be the reason why liquidity has kept staying ample since the beginning of the year despite PBOC's reluctance to make a net liquidity injection (chart 2).

 

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Given the likelihood of an imminent renewal of the RMB appreciation trend, we reckon that there is very little room for banking system liquidity to go tighter in the near term. Against this backdrop, the yield curve will likely turn steeper again (chart 3) even if selling pressure on bonds may increase a bit over the rest of the month due to quarter-end factors.

 

IGM

EUR/GBP 0.8500-0.9000 range to continue holding

Like April and May, we continue to bet on the Eur/Gbp's 0.8500 - 0.9000 range holding. Sturgeon's SNP fell short of achieving the high bar of a majority on its own in May, but with the Green Party, the Scottish Party does have a majority who want independence. Sturgeon remains defiant. She wants another referendum. It could end up in the courts, but looking at history we note that GBP is not a major mover on campaigning for a fresh independence vote. It will likely only move on Scottish politics if and when a new vote date is near. Even then, the outcome seemingly remains a coin-toss. Meanwhile, despite Brexit agreements, intermittent political spats between the EU and UK seem inevitable with possible legal action over the Northern Ireland protocol simmering in the background still. In May, UK PM Johnson sent Royal Navy vessels to the waters around Jersey amid a mooted blockade by French fishing boats off the port of St Helier, Jersey's main entry point for supplies. France retaliated by threatening to cut power to Jersey, with the British province importing 95% of its electricity from Paris. We expect some positive EUR/GBP catch-up towards the range's topside extreme in the coming months thanks to progress on the EU recovery fund and vaccine rollout amid the feeling we have passed peak divergence with the UK on administering jabs.

 

IGM

 

Long Term FX Majors & Rates Forecasts

IGM

  • IGM FX and Rates

    IGM Insights

    By Jonathan Cavenagh 09 Jun 2021

    IGM

    IGM Insights | Wednesday, 9th June 2021 - Viewpoint - Extend and Pretend - Emerging FX - Seasonality in June - China Insight - Liquidity stays ample despite PBOC FX intervention - FX Majors - EUR/GBP 0.8500-0.9000 range to continue holding - Long term FX Majors & Rates forecasts

    Topic Industry News

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    By Jonathan Cavenagh 26 May 2021

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    IGM Insights | Wednesday, 26th May 2021 - FX Majors - USD momentum remains weak - US Rates - Politics intrudes on the Biden agenda - Emerging Asia - Better prepared for taper talk than in 2013 - CEEMEA - South African Rand's prospects into year end - Technical Analysis - NZD/USD weekly

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    By Jonathan Cavenagh 13 May 2021

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    IGM Insights | Wednesday, 12th May 2021 - Viewpoint: Some Inflation thoughts - Emerging Asia – Central banks likely to push back against tightening pressures - CEEMEA/LATAM FX - Base metals and central banks supportive - China – CGBs may benefit from equity-bond performance trade off in May - Long term FX Majors & Rates forecasts  

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  • IGM FX and Rates

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    By Jonathan Cavenagh 28 Apr 2021

    IGM Insights

    IGM Insights | Wednesday, 28th April 2021 - G10 – Commodity bloc still likely to be favored over low yielders - Emerging – Mexican Peso set to reap rewards of US recovery - China – PBOC may turn proactive to inject liquidity in May - Technical Analysis – Copper/Gold ratio at three-year lows

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    IGM Insights

    By Jonathan Cavenagh 25 Mar 2021

    IGM FX and Rates

    IGM Insights | Wednesday, 24th March 2021 - Dollar - USD momentum continues to build - Europe - ECB's long Q2 supports Bund-UST widening - Emerging Markets - Russian Rouble in the face of new sanctions - China - Let's capitalize on government deleveraging

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    IGM Insights

    By Jonathan Cavenagh 11 Mar 2021

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    IGM Insights | Wednesday, 10th March 2021 - Dollar – Too soon to fade the USD rebound - China – Biased against further monetary easing - Emerging Markets – Brazilian Real woes to worsen - Long term FX Majors & Rates forecasts 

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  • IGM FX and Rates

    2020 Year in Review

    By Jonathan Cavenagh 22 Dec 2020

    2020 Year in Review

    The positive risk bias at the start of 2020 for EM Asia assets didn’t last long. The synchronised global economic upswing quickly unravelled as the COVID pandemic swept through EM Asia economies. The epicentre of the pandemic was in China to begin with and as China went into lockdown Q1 was a write off for economic growth in the region. From a peak in mid-January to late March, the ADXY currency index lost 5%. There were significant divergences within the region though, with the IDR losing close to 15% against the USD, the baht 8.6% and INR 5.5%. IDR and INR are typically current account deficit currencies and sensitive to broader risk appetite, whilst the collapse in tourism inflows weighed heavily on the baht. In contrast, the PHP was basically flat against the USD in Q1, while the TWD only lost 0.67%. The Philippines has fairly limited offshore investor positioning, which served it well, while Taiwan managed the pandemic very well and this was reflected in relative currency outperformance…

    Topic Industry News

  • IGM FX and Rates

    2020: That was the year that was - U.S. High grade primary markets

    By Ken Jaques and Shankar Ramakrishnan 22 Dec 2020

    2020: That was the year that was - U.S. High grade primary markets

    2020 will be known for the Great Debt Binge when corporate America and a host of foreign companies raised an unprecedented amount of capital via the USD public debt market amidst the worst pandemic crisis in over a century...

    Topic Industry News

  • IGM Credit, IGM FX and Rates

    China Insight: A return of focus to credit clean-up in 2021

    By Riki Zhang | EM Analyst 14 Dec 2020

    China Insight

    Concerns over China corporate credit risk have come to the forefront since the beginning of Q4, highlighted by three high-grade issuers' defaults: 1. AAA-rated Huachen Auto Group (onshore), 2. AAA-rated Yongcheng Coal & Electricity Group (onshore), 3. AAA-rated Tsinghua Unigroup (offshore) Coincidentally, all of these three issuers are state-owned enterprises (SOEs) in nature. This, to a certain extent reflects central government's bias in favour of a return to policy normalisation and possibly a second round of financial deleveraging (following the first round in 2017). Chart 1 shows that China's total debt to GDP ratio may have reached as high as 290% by the end of this year, so there is a need for deleveraging regardless of the defaults YTD being smaller than those in the previous two years both in terms of the total number and the total size of events (chart 2). From the perspective of the policymakers, with various kind of economic activities having returned to their pre-COVID levels, a return of the focus to credit clean-up should be more beneficial to long-term economic development... 

    Topic Industry News

  • IGM Credit, IGM FX and Rates

    China Insight: Slower and bumpier RMB appreciation in year ahead

    By Riki Zhang | EM Analyst 07 Dec 2020

    China Insight

    There is good chance China will be the only major economy in the world to generate positive GDP growth (around 2%) in 2020 due largely to its effective pandemic containment measures and consequently the faster recovery of the production and consumption. As far as the FX is concerned, RMB has been appreciating against USD since the beginning of June on the back of broad-based weakness of greenback (chart 1). Besides, RMB has also been appreciating against all EM Asia currencies (except KRW) since USD's multi-month downtrend kicked off in early-summer. We attribute the RMB's outperformance relative to the rest of EM Asia to growing hopes of a victory of Biden in the 2020 presidential election, who's obviously far less hostile to China and promised to remove the existing tariffs on China in case he becomes the next US president...

    Topic Industry News

  • IGM FX and Rates

    FX Viewpoint – Seasonality in December?

    By Tony Nyman 01 Dec 2020

    FX & Rates

    In our Q4 version of Oct 5, we concluded that 15-20 years ago, it was a good bet to short the DOLLAR. More recently, we have seen strength. We continued Q4 seasonality this year could come second to the potentially big drivers of COVID vaccine hopes, a resilient global economy, the Biden lead and Brexit, but BEARS might want to look at a LONG AUD/USD (but of course the RBA could well cut rates before the year is out). The last 20 years has seen an ave of +0.9% during Q4 and current standing is +2.5%. We added USD BULLS might consider a LONG USD/NOK. An ave win of +1.4% since 2000. A very short NOK market though has rocketed in this risk-on environment and the less said about the -5.0% USD/NOK losses the better! So far in the month's early exchanges, the USD is mostly slightly lower, from -0.03% AUD through to -0.3% CHF and EUR and -0.4% SEK. Only USD win so far is the tiny +0.1% YEN. How does the big DOLLAR tend to fare generally in the run-up to year-end? Further, are there any G10s that seem to perform particularly well/badly through Dec? For more read our FX Viewpoint Blog >

    Topic Industry News

  • IGM FX and Rates

    Viewpoint: RBI intervention here to stay but INR FX may do better in Q1 2021

    By Jonathan Cavenagh 30 Nov 2020

    IGM Viewpoint

    - INR's underperformance in 2020 has been quite stark given the supportive balance of payments backdrop for the currency. The current account balance has shifted into surplus for the first time since 2004 and net FDI inflows have more than offset net portfolio outflows. INR FX is also cheap relative to our short term fair value model and has not caught up with the improved risk back drop reflected in higher equities. - This large divergence mainly reflects the RBI's continued aggressive FX intervention, which has seen FX reserves for the central bank rise sharply and offset the balance of payments surplus. - In this piece we outline the medium term drivers of RBI's FX intervention, which we feel are mainly geared around currency competitiveness. India inflation is generally higher than its trading partners, which means nominal FX appreciation needs to be contained to offset this trend, while India's share of global goods exports has stagnated in recent years. The country also has structural trade deficits with big manufacturing economy's like China. - We conclude that RBI FX intervention will remain a key feature of the INR FX landscape. - Still, there is a scope for the intervention pace to moderate from heady levels into 2021. Historically, stronger wholesale inflation pressures sees the pace of intervention slow as the authorities become more comfortable with some FX strength to offset imported inflation pressures. A continued recovery in global commodity prices suggests the risks for India's wholesale inflation outlook are skewed to the upside. - FX intervention also tends to come down when export and IP growth trends improve, which is also a risk as we move into early 2021. Coupled with the fact that Q1 tends to be the best quarter for INR FX from a seasonal stand point, suggests to us the market will use USD/INR spikes between now and year end as dollar selling opportunities. See the full note below for more details. Read on for more...

    Topic Industry News

  • IGM Credit, IGM FX and Rates

    China Insight: Deleveraging already starts to kick in, as per PBOC Q3 report

    By Riki Zhang | EM Analyst 30 Nov 2020

    China Insight

    PBOC Q3 monetary policy report released on 26 November reinforces our view that liquidity will be going tighter and deleveraging may be getting more prominent in the months ahead. The report, echoing the need to stabilize leverage, direct financing and control financial risk suggested by PBOC governor Yi Gang in a research paper published on 17 Nov, indicates second-phase deleveraging is kicking in, though it, in terms of magnitude, may be more gentle than the first-phase in 2017 (chart 1).

    Topic Industry News

  • IGM FX and Rates

    Viewpoint: CBRT raises Lira prospects, but will policy shift be sustained?

    By Natalie Rivett 25 Nov 2020

    Whilst the CBRT's efforts looks to have offered some light at the end of the tunnel for the Lira, the recent breather suggests it may still take some time to restore confidence back into the Turkish currency... read on for more...

    Topic Industry News

  • IGM FX and Rates

    Viewpoint: EM Asia FX pullbacks likely to remain fairly modest

    By Jonathan Cavenagh 23 Nov 2020

    Asia FX

    With EM Asia FX already trading at a premium to equity market sentiment, China credit wobbles and central bank rhetoric, we do not rule out further dips. Our short-term fair value models suggest the better value rests with higher yielding currencies…

    Topic Industry News

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