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25 Jan 2016
Asia: Liquidity, liquidity, everywhere – Deutsche Bank
FXStreet (Delhi) – Research Team at Deutsche Bank, suggests that globally the taps are being turned on again and with risk failing to bounce on its own, the central banks are stepping back in.
Key Quotes
“The most notable one is of course China, which has net injected upwards of $200bn of RMB liquidity into its local markets in the last few days through a combination of short and medium term liquidity operations. To be sure, this is most immediately targeted towards ensuring against a funding squeeze around Chinese New Year. But in that it has also used medium term lending facilities, the PBoC is clearly looking to sterilize more definitively the pickup in capital outflows from over the past couple of months.
We are of the view that combining these liquidity operations with RRR cuts would be the most effective way to stabilize funding costs in the local bond markets. We expect an additional $60bn equivalent of medium term RMB liquidity injection over the next couple of weeks to stabilize the liquidity condition.
China does not stand alone. The ECB’s dovish tone sets up, according to our European colleagues, for easing in March, and for likely acceleration in the pace of QE. BoJ is believed to be considering a similar expansion in its monetary easing as well, with oil prices weighing on the inflation target for the central bank.
Here in Asia, Bank Negara surprised us with a 50bp cut to its statutory reserve requirement ratio, both to supplant the liquidity taken out by capital outflows from last year, and possibly as a signal of its readiness to ease in the event of further downside risks to the economy.
Central bank officials in Indonesia were similarly of the view that cutting reserve requirements was an important part of their toolkit to manage the cost of liquidity, in addition to adjusting policy rates.
It would need improvement in policy assurance from China, windfalls from lower commodity prices to emerge, and for fiscal spending to take more centre stage, among others, for emerging markets to see a trough.
Inflation is not in vogue, and breakevens on linkers have been compressing in most markets. But we still make a medium term valuation case for linkers in Thailand. With Thai 5Y breakeven inflation now at -15bp, the market is effectively pricing in deflation over the next 5 years as opposed to an average +2% realized inflation over last 5 years.”
Key Quotes
“The most notable one is of course China, which has net injected upwards of $200bn of RMB liquidity into its local markets in the last few days through a combination of short and medium term liquidity operations. To be sure, this is most immediately targeted towards ensuring against a funding squeeze around Chinese New Year. But in that it has also used medium term lending facilities, the PBoC is clearly looking to sterilize more definitively the pickup in capital outflows from over the past couple of months.
We are of the view that combining these liquidity operations with RRR cuts would be the most effective way to stabilize funding costs in the local bond markets. We expect an additional $60bn equivalent of medium term RMB liquidity injection over the next couple of weeks to stabilize the liquidity condition.
China does not stand alone. The ECB’s dovish tone sets up, according to our European colleagues, for easing in March, and for likely acceleration in the pace of QE. BoJ is believed to be considering a similar expansion in its monetary easing as well, with oil prices weighing on the inflation target for the central bank.
Here in Asia, Bank Negara surprised us with a 50bp cut to its statutory reserve requirement ratio, both to supplant the liquidity taken out by capital outflows from last year, and possibly as a signal of its readiness to ease in the event of further downside risks to the economy.
Central bank officials in Indonesia were similarly of the view that cutting reserve requirements was an important part of their toolkit to manage the cost of liquidity, in addition to adjusting policy rates.
It would need improvement in policy assurance from China, windfalls from lower commodity prices to emerge, and for fiscal spending to take more centre stage, among others, for emerging markets to see a trough.
Inflation is not in vogue, and breakevens on linkers have been compressing in most markets. But we still make a medium term valuation case for linkers in Thailand. With Thai 5Y breakeven inflation now at -15bp, the market is effectively pricing in deflation over the next 5 years as opposed to an average +2% realized inflation over last 5 years.”