FxWirePro: What does mounting buying sentiments by FX reserves managers in bond markets imply?

FX reserve managers, which have started accumulating reserves again since the second half of 2016, are on track to be purchasing $140bn of bonds this year with a further rise likely for 2018.

Assuming continued capital inflows to EM, in particular, equity and FDI flows, we project that bond purchases by FX reserve managers will increase to $330bn in 2018, the same level as in 2013.

This implies a return to pre-oil crisis, i.e. pre -2014, pace. This would represent normalization in FX reserve manager flows rather than a return to very high accumulation years.

As can be seen in the above figure, this $330bn projection still stands below averages by historical standards.

Accordingly, US HG & HY spreads -15bp and -20bp, respectively, so 2% and 5.5% returns. Euro HG spreads +6bp & HY +70bp (-1% to 1% returns).

The perspectives in FX space during 2018: USD to rally in Q1/Q2, then reserve lower to end year - 2%. By year-end, USD higher vs AUD, NZD, MXN, INR, TRY & ZAR; lower vs EUR, JPY, CAD & BRL; and stable vs CNY and KRW.