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We are forecasting most Asian central banks to hit peak policy rates and enter into pause mode by the end of 2Q, alongside the Fed and ECB. The exceptions are BOT where we expect policy rates to peak only in 3Q and PBOC where we could potentially still get a couple of MLF cuts over 2Q and 3Q. With narrowing divergences across central bank policy outlooks, 2Q is likely to be a quarter of relative stability and lower volatility in Asia macro markets. In such an environment, investors are likely to focus on carry strategies, which would favor high-yielders such as Indonesia and India. Comparatively, the rest of Asia macro markets may not benefit as much, because short-term local rates are lower than the US. Some investors could also underweight/short Asia's low-yielders to fund overweight/long positions in Asia's high-yielders, especially if they have low conviction on the outlook for US rates and the broad USD.
CNY Rates - The likelihood of another leg higher in rates in 2Q appears to be fading. There are a few fundamental factors which we feel rightly argue for higher rates, including faster-than-expected recovery (economic surprise indices are elevated), solid credit growth (per TSF data), tighter liquidity and frontloaded LGB/CGB supply. However, while there has certainly been more positive growth data points than negative ones, markets appear to be more interested to focus on the negatives and doubt the durability of China's recovery. Foreign inflows into onshore equities, the most direct play on recovery, have slowed and suggest low conviction beyond the initial reopening-led rebound. With CPI/PPI prints also continuing to trend lower, it is difficult for markets to start to think about the prospects of rate hikes. As a result, we think medium and long-term market rates, such as 5Y IRS and 10Y CGB, are likely to stay rangebound.
INR Rates - RBI announced a 13D VRRR auction to be conducted today with notified amount of INR500bn. Banking liquidity has largely been in a small surplus but the outlook is one of tightening and liquidity could move into a deficit position in the coming months. O/N Mibor is thus expected to largely fix in the top half of the LAF corridor. The tighter liquidity outlook could already be well-expected by IGB markets, and therefore, may not necessarily result in higher IGB yields ahead.
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