J.P. Morgan On IDR & CNY
The US bank weighs in on the IDR and CNY, seeing gradual yuan depreciation. It remains market weight on IDR.
J.P. Morgan: "Against our and consensus expectations, Bank Indonesia (BI) raised its policy rate 25bp to 6.25% this week in response to the rise in US rates, related rise in risk premia and also from the deterioration in geopolitical tensions and its potential impact on energy prices. The unexpected rate hike draws into focus the importance of FX stability in the central bank’s reaction function, which has been sensitive to changes in net FX reserves, a proxy for BOP flows. Despite BI’s defence, IDR still has to contend with challenging dividend outflow seasonality and a pan-Asian Yen-Yuan problem. Current stresses on the IDR are also seasonally and tactically ill-timed. Seasonally, all HY EMs have to contend with a potentially problematic sell-in-May dynamic for risky assets next month, which global investors are liable to be rightfully watchful around after the tremors in Latin bonds/FX and US tech stocks last week. In addition, we are currently in the thick of the Indonesian dividend outflow season that runs from March to July and can be worth 4-6% of GDP, although the spillover onto the currency is not necessarily linear and can be swayed by context-specific factors (see Asia FX Dividend seasonality). These seasonal flow challenges compound ongoing negative spillovers from weakness in two major APAC FX bellwethers – JPY and CNY. As we empirically demonstrated in a recent note (The sun rises in the east: Assessing spiral dynamics in EM Asia FX), North Asian FX is understandably the frontal casualty of the Yen-Yuan twin depreciation impulse, but South Asia is not entirely insulated, and IDR (in addition to PHP) stands out for its surprisingly meaningful exposure to this dynamic within the latter cohort. We remain MW IDR FX in GBI EM.
CNY: While the PBoC has kept the CNY fixing at sub-7.11 levels, there are signs of easier FX controls as offshore CNH liquidity collapsed on lighter-than-expected state bank smoothing. Banks have also adjusted their line of defence higher in the onshore market with USD/CNY breaking above 7.24 this week. While the pace of depreciation still looks managed, the nuanced changes in intervention signal greater tolerance of a weaker currency by the PBoC. Fear of a sharp devaluation move like 2015 look largely overdone in the absence of alarming over-valuation in CNY NEER and REER. However, as a laggard in recent FX moves globally, CNY does look to have scope to catch up, and we think the PBoC can tolerate a paced/managed depreciation after strong resistance in the past few months. Meanwhile, the latest data from SAFE suggest that Chinese corporates are not lending any support to CNY FX despite the recent range break. Instead of increasing USD conversion on higher USD/CNY moves, corporates in China have in fact further reduced their dollar selling, pushing the FX settlement ratio to the lowest March level since 2016. This underscores prevailing demand in dollars from onshore investors with rate differentials staying unfavourable. We stay bearish CNY FX."