Razor EA Discussion

Oil prices have dropped on open partly as a result of Houthi rebels pausing hostilities against
Saudi Arabia on Saturday in a three day truce, whil e China’s troubles wit h Covid have raised
concerns on demand from the worl d’s largest crude oil import er. WTI was t rading at -2.90% and Brent was seen trading at -2.58%. NOK saw losses of 0.40% alongside crude oil prices.

JPY dipped 0.78% intraday, continuing losses last week. The move was triggered by a BoJ bond
purchase offer early in Asian trading, as the 10 year JGB yield approached 0.245%, close to the
0.25% threshold. As we noted last Friday, the buying operation has further emphasized the policy divergence, which has resulted in the drop in JPY.

GBP: BoE’s Governor Andrew Bailey speaks on the economy at 12:00 BST. Citi
Economics thinks the key factors to look for in comments will be 1) the perceived hit to demand owing to recent energy price moves; 2) the potential for sustained domestically driven inflation in the face of such pressures; and 3) concerns about the BoE’s own institutional credibility (and inflation expectations). We expect Bailey to continue to guide towards further near term tightening, but only a limited scope for further moves.

HKD: Trade Balance HKD at 09:30 BST for February. Citi Economics expects HKD -27.2bn vs
HKD 6.6bn prior. We expect trade growth to be affected by holidays as well as Covid-related truck traffic across the border. Combined, January and February data are likely to show signs of softening, and we expect the same softness in March due to anti-pandemic measures in the Honk Kong and Guangdong area.

NOK: Norges Bank Deputy Governor Borsum speaks at 11:00 BST. This will be the fi rst speech
following last week’s relati vely hawkish Norges Bank meeting, where policy rates were raised +25bps and terminal rate forecasts were revised upwards. While it is unlikely Borsum’s comments will move markets, we listen for clues on potential monetary easing at the end of the cycle, as implied by the revised terminal rate forecast that expects rates to reach 2.50% by Q1 2024 but then fall to 2.30% by yearend 2025.

MXN: Trade Balance at 13:00 BST for February. Citi Economics expects USD -0.18bn vs USD -
6.29bn prior. We estimate a 4.5% MoM growth for total exports (vs -5.3% MoM prior) on higher manufacturing and oil exports and a 2.5% MoM growth for total imports (vs a -3.4% MoM prior).

Rates markets continued to be in focus post the European close, as flattening pressures resumed. UST 2y yields popped 8bps higher in Asia, with the rest of the curve up 2-3bps. Equity markets held onto their gains seen post European close, while oil markets held steady following yesterday's declines. DXY saw a slight decline after an initial spike in Asia, with G10 currencies mostly in the green against the dollar. JPY gained, paring some of yesterday’s losses, as BoJ bond purchase operations saw better takeup. In the EM markets, KRW rallied on the back of corporate unloading of USD, and broad downside pressure on USDKRW from lower oil prices.

Looking ahead, two days of talks with Russia in Istanbul are set to start today. USD will see Fedspeak from Harker, who is expected to be hawkish, after consumer confidence data. EUR also sees consumer confidence data. EM markets will look forward to ARS economic activity data and a rate decision from CLP, in which Citi Economics expects a +175bps hike to 7.25%

Markets saw slightly different price action in the NY and Asian session, although the broad trend remained in place. The NY session post European close saw a retracement of earlier moves, dictated by positioning and liquidity, rather than new information.

The Asian session on Tuesday saw rates markets continue to be in focus. US 2y yields popped higher by 8bps, with the rest of the curve seeing modest 2-3bps increases in yields. USD saw an early bid which gave way shortly, as seen by a spike in DXY. DXY is slightly in the red on the day, with G10 currencies a tad in the green against the dollar.

Equities held onto their gains seen in the NY session, while oil prices held steady after a before the WSJ report late in the NY session helped to stabilize prices – citing Kpler data, it reports that exports of Russian oil by sea fell to the lowest level in nearly eight months last week. Both supply and demand concerns are likely to continue weighing on markets.

BoJ saw a take-up of JPY 242.6bn from investors, much higher than the JPY 67.5bn from yesterday’s second operation. We remind that BoJ has begun its three day plan for unlimited bond purchases of some notes on Tuesday morning. This was followed by a second offer alter In the day. JGB 10 year yield remained at around 0.248%.

USD: Fedspeak meets consumer confidence:
– Conference Board Consumer Confidence at 15:00 BST for March. Citi Economics expects the Conference Board’s measure of consumer confidence to rise modestly to 110.9 in March, in contrast to another decline in the University of Michigan sentiment index. The Conference Board’s measure of confidence focuses much more on assessments of employment conditions, which have been consistently strong. The strength of the labor market is a key factor keeping the Fed less concerned about much weaker activity despite quickly rising interest rates.

EUR: France Consumer Confidence at 07:45 BST for March. Citi Economics expects confidence to remain relatively unchanged at 95 (vs 98 prior), though risk is of a lower print, given the geopolitical conflict. This would follow last week’s weaker confidence surveys on the back of the Russia/Ukraine conflict as well as high energy prices.

The ZAR’s recent appreciation is justified and likely to extend
Positive terms of trade dynamics, relatively low inflation with hawkish SARB making room for a stronger ZAR
We now see USD-ZAR ending the year at 13.7

We recalibrated our SGD NEER model – we updated the weights and revised the slope assumption for January 2022
With the slope now at 1.5% by our new estimates, HSBC thinks the MAS will re-centre the policy band higher in April
We like the SGD and think FX forward points can fall further

Model update
We have refreshed our estimation of the SGD NEER index. Our previous index over-estimated the MAS’s index by around 20bp in recent months.
But tracking error cannot entirely explain the overshooting of our SGD NEER
index from the top-bound of the band that occurred a few times in the second half
of March. Thus, we have also revised one of our assumptions for the policy band
parameters. We now believe the MAS raised the slope by 1ppt on 25 January
2022 (previous assumption: 0.5ppt), therefore bringing the current slope to 1.5%
(previous assumption: 1% slope).
We estimate that the SGD NEER was 1.9% above the midpoint of the band at the
end of 29 March 2022 in our new model.

FX strategy
We like the SGD, since we believe the MAS will not be done with policy tightening,
even if it does what we expect it to do in April 2022 (i.e. re-centre higher) and in any
case, it can also crawl higher along the upper-bound of the positively sloped band.
We suggest considering a bespoke SGD basket (comprising the RMB, AUD,
TWD, USD and GBP). Our USD-SGD forecast for end-2022 is 1.32. We also expect
FX forward points to fall further – for example, it will probably not be unreasonable to
expect 12m points to head towards -200 eventually, based on a 1.5% slope.

It is hard to say exactly what the FX market is prepared for, with regards to the April 2022 MPS.
In our view, some market participants will probably be disappointed if there is no upward
re-centring, and the SGD NEER may thus fall in the near term – not unlike what happened
after Finance Minister announced on 18 February that the GST hike will be delayed and
staggered (therefore reducing the likelihood of an imminent re-centring, compared with a
scenario whereby the GST hike will be implemented in July 2022). That being said, if a slope
change was announced in conjunction with a wider band, we think the knee-jerk fall in
the SGD NEER will likely be more contained, compared with if the MAS only makes another
slight change in the slope or worse yet, leave all policy parameters unchanged.