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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.
