EM ASIA CREDIT: Hon Hai: AI continues to drive growth

• RES 4: 1.4167 50.0% retracement of the Feb 3 - Jun 16 bear leg
• RES 3: 1.4111/39 High Apr 10 / 3.0% Upper Bollinger Band
• RES 2: 1.4072 Bull channel top drawn from the Jul 23 low 
• RES 1: 1.4034 High Oct 9 and 10
• PRICE: 1.4002 @ 08:17 BST Oct 13
• SUP 1: 1.3916/3856 20- and 50-day EMA values  
• SUP 2: 1.3795 Bull channel base drawn from the Jul 23 low 
• SUP 3: 1.3727 Low Aug 29 and a bear trigger 
• SUP 4: 1.3689 Low Jul 28 

A bull cycle in USDCAD remains intact. Last Thursday’s rally confirmed a recent bull flag on the daily chart and a resumption of the current uptrend. Moving average studies are in a bull-mode position, highlighting a dominant uptrend. Sights are on 1.4111 next, the Apr 10 high, and further out scope is seen for an extension towards 1.4167, a Fibonacci retracement. First key support is at 1.3856, the 50-day EMA. 

• Danske Bank note that the market impact is tricky to gauge “since the final set-up of the certificate program has yet to be decided”.
• However, their current base case is for a “NOK 50bn program with weekly auctions which, given the current level of structural liquidity, is likely to return FRA/Nowa back to the mid-20s (our model estimates)”. Current NOK FRA/OIS spreads are around 15-17bps.
• They think that “the very short-dated treasury bills and NGBs are also likely to cheapen”.
• They caveat that while “a new asset class does make NOK FX more investable for foreign investors looking for low duration placement opportunities"...."we think much more important drivers are at play in determining the direction of NOK FX and hence we want to downplay the FX spot impact of this announcement”.

On Friday evening, Norges Bank announced the introduction of Central bank certificates as a new instrument to mop up excess liquidity. Following a consultation with relevant participants, the bank aims to start issuing certificates during 2026. Existing liquidity operations under the quota system (F-loans, F-deposits) will remain in place. See the consultation letter (in Norwegian) here.

• A reminder that Norges Bank aims to maintain total liquidity (i.e. central bank reserves) between NOK30-4bln. Structural liquidity is much higher than this level, so Norges Bank provides F-deposits to drain excess liquidity and ensure the target range is met.
• Structural liquidity in the Norwegian banking system has increased in recent years because “government debt borrowing over time has been lower than transferred dividends from Norges Bank and the government's actual borrowing requirements”. As of this year, the Government also stopped sterilising increases in Norges Bank FX reserves with issuance (meaning Norges Bank now purchases NOK FX in daily operations to prevent unwanted rises in central bank reserves).
• Norges Bank writes that “The effects of high structural liquidity have been evident in the Norwegian money market in recent years...Money market spreads have reached very low levels as structural liquidity has increased…At the same time, turnover in the interbank market has fallen….Both of these trends indicate that banks have less need to insure themselves against liquidity risk and that they are redistributing liquidity among themselves in the money market to a lesser extent”.
• “Central bank certificates will be used to draw down central bank reserves over longer periods. The certificates will be made available for purchase by both banks and other non-bank investors (the public)“.

Figure 1: NOK Scarcity Premium and Structural Liquidity Over Time (Source: Norges Bank)

Figure 1: Norges Bank Liquidity Forecasts (Source: Norges Bank)