Rates markets ripe for shake up as five Asia central banks meet

Bloomberg

This week looms as a key one for Asian financial markets with no less than five central banks set to hand down decisions that may set the tone for the rest of the year.
Markets are predicting policy makers in India, the Philippines and New Zealand will all cut interest rates to shore up faltering growth, while those in Australia will pause after back-to-back moves, and Thailand looks set to avoid lowering borrowing costs at all.
Here’s a roundup of what rates markets are pricing in for each of the central banks reporting this week and some possible trades suggested by their diverging outlooks:
The Reserve Bank of New Zealand (RBNZ) announces policy. Markets are fully pricing in a 25 basis-point cut from the current 1.5%, a follow up to a similar move in May. Swap markets suggest the central bank will cut again later this year, and possibly once more by April.
A lot is priced in, but RBNZ has said it may allow interest rates to fall as low as minus 35 basis points, according to a Treasury paper prepared earlier this year looking at options for unconventional monetary policy. That means there’s plenty of room for rates to go lower.
The Reserve Bank of India also announces, and markets are broadly pricing in a rate cut this week and another in the next six months. The central bank lowered its repurchase rate to a nine-year low of 5.75% in June and paved the way for more easing. Significant rate cuts would do a lot of good for the country, Finance Minister NirmalaSitharaman said last week.
More easing is coming and that should be bullish for Indian swap rates, especially as there’s plenty of room to keep cutting if inflation stays in check. Data released earlier this month showed consumer prices rose 3.13% in June from a year earlier, below RBI’s target of 4%.
Some economists are predicting a rate cut when the Bank of Thailand meets this week but the market isn’t pricing one in. The central bank has preferred to use verbal intervention and reducing bond supply to guide the local currency rather than adjusting interest rates. The stronger dollar has taken some pressure off the baht (and the central bank) and may help push up short-dated rates as well.
The forward curve has shifted lower since the end of May with three-month money-market rates fixing about 30 basis points below the central bank’s benchmark. This would typically signal lower rates, but in this case appears to reflect a stronger baht, and the flat-term structure argues against any change in central bank rates.
After a pause in June, BangkoSentralngPilipinas appears ready to play ball when it meets on Thursday. The forward curve has tumbled about 70 to 90 basis points since late May, and markets are pricing in around 50 basis points of rate cuts over the next quarter. This suggests the overnight rate will drop to about 4%, though the pricing is a bit unclear given the noise from the credit component.
Annual inflation has slowed over the past six months, with economists predicting a decline to 2.3% for July, which would be near the bottom of the central bank’s 2%-to-4% range. This should give a further boost to rate-cut bets.
Take-Aways
The diverging outlooks for the five central banks announcing policy this week throws up a number of potential trades. Signs of stability in Australia and a possible floor under rates provides some room for Aussie short-end rates to rise, particularly against those of New Zealand where there is plenty of scope to ease.
Turning to Southeast Asia, Thai swap rates may be set to underperform as the baht has room to soften, while rates in the Philippines and India have scope to reset even lower. In the world of cross-market positions though, it’s important to remember everything is relative.