Mizuho Daily – Floating Boats

Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,

Floating Boats 

Question is, what may be floating the boat of reflation bets as UST yields surged (10Y above 1.7%), lifting USD with it, and equities apparently in rotation mode (Dow up 0.3% led by consumer staples and industrials while Nasdaq in contrast is down 0.6%). Part of that might have to do with literally floating a boat (ok, an enormous container ship). Ever Given being fully (re-)floated, unblocking the Suez Canal, is somewhat of a ‘Goldilocks’ reflation bet as costs get pushed up without supply-chain disruptions endangering growth.

This plays into Biden’s $3trln infrastructure plan, due to be announced on Wednesday. Especially given that the infrastructure plan is now being galmmed up by whispers of being enlarged to $4trln also appeared to be floating the boat of reflationistas.

Finally, the Archegos Capital meltdown being relatively ring-fenced, rather than resulting in a contagion right out of the gate, probably floated the boats of the more risk averse corners. But while boats were clearly floated, it is also clear that not all risks have been shipped off. USD strength was reaffirmed along with UST yields and arguably some background risk hedge.

With that, USD/JPY is knocking up against 110 (albeit still a tad shy of), EUR is slipping to mid-1.17 and AUD is below mid-0.76 (although retaining traction above 0.76).USD/SGD is also buoyed towards 1.35 although perhaps still not as high as it might have been lifted given broad-based USD strength that has also lifted USD/CNH towards 6.58. Floating boats is one thing, although not all boats are lifted by rising tides.

Malaysia’s Reaffirmed Bond Index Inclusion

Speaking of floating (one’s) boat, FTSE Russell reaffirming Malaysia’s inclusion in bond index for government bonds will float the boats of investors and the BNM alike. The threat of Malaysia being dropped from the World Government Bond Index (WGBI) has blown over as FTSE Russell dropped Malaysia from the watchlist for possible exclusion. This reaffirmation is wholly warranted and should provide backstop the ringgit (MYR).

To be sure, worries of Malaysia’s exclusion from the WGBI on account of ratings downgrade by Fitch (from A- to BBB+) last year and/or increased debt issuances this year were misguided. Point being, Fitch’s arguably ill-timed downgrade was neither definitive nor materially changed Malaysia’s status as an investment grade credit. If anything, the recovery in oil and prospects for post-COVID recovery suggest positive economic spillover to the credit profile.

Crucially, exclusions on (unfounded) credit and debt profile concerns would have been a case of bait and switch in any case given FTSE Russell’s justifications for Malaysia getting on the watch list were premised on concerns about market liquidity and (in)ability to hedge. And the BNM has addressed these concerns; by introducing measures to significantly enhance the ability to hedge FX risks as well as deepen bond market liquidity/pricing.

– Admittedly, the BNM has not fully lifted the ban on offshore MYR trades. But measures to avail (after-hours) MYR access and expanded FX hedging tools significantly mitigate risks. Could FTSE Russell have a wishlist for more unfettered acccess? Sure. But is that justifiable grounds to keep Malaysia on the watchlist (much less exclude from the WGBI)? Surely not. Given Malaysia’s fairly high real rates, improving economic outlook (looking past near-term COVID-related bumps) and steady, not deteriorating, credit profile, FTSE Russell removing this artificial uncertainty should boost investor appetite for Malaysian assets; all else equal.

Against a backdrop of with reduced foreign holdings of MGS, “re-entry” may set the stage for better MGS prices (lower yields) and MYR boost. But MYR bulls-in-waiting will have to defer to the current strong USD wave that is likely to be a more compelling for the time being.

Source: Mizuho Bank Ltd