EM ASIA CREDIT: MNI EM Credit Market Update - Asia

Reports from local media suggesting that confirmation of an agreement on a new governing coalition will be announced later today. The conservative Christian Democratic Union (CDU), its Bavarian sister party the Christian Social Union (CSU) and the centre-left Social Democrats (SPD) will hold a presser at 1500CET (0900ET, 1400BST) reports Hans von der Burchard at Politico. At present, coalition talks are still underway. 

• Bild reports 'leaked' parts of the agreement: "Employees are to be given relief. Among other things, the tax rate is to take effect somewhat later and be somewhat flatter. This will provide relief for every taxpayer, according to sources involved in the negotiations. The SPD's demand for tax increases for high earners and small and medium-sized businesses will not be implemented."
• Die Welt reports that CDU leader and chancellor-in-waiting Friedrich Merz will speak to lawmakers from the CDU/CSU parliamentary group at 1800CET, with CSU leader Markus Soeder convening his group alone shortly beforehand at 1630CET. For the SPD, the executive committee and the parliamentary group executive committee will be informed at 1630CET, before the wider parliamentary group is told of the agreement at 1800CET.
• While the CDU/CSU will be able to approve a coalition agreement among the party grandees, the SPD grassroots membership will be consulted on the deal, lengthening the timeframe of a new coalition coming to power.
• The agreement comes with Merz under significant pressure, particularly from the right of the CDU/CSU, which has warned he is giving away too many concessions to the SPD in pursuit of a swift agreement. Recent opinion polling has shown the far-right Alternative for Germany (AfD) drawing level with the Union parties at the top of polls for the first time. 

Chart 1. Federal Election Opinion Polling, % and 3-Poll Moving Average

Source: INSA, Forsa, GMS, Infratest dimap, Verian, FGW, YouGov, Allensbach, Ipsos, MNI. N.b. First data point represents result of 23 Feb federal election. 

That Reuters report on China's approach to FX comes as USD/CNY saw the highest fix since 2023 this week, within range of record highs of 7.2258 in June that year.

• The comments were made via 'window guidance' to state banks this week (it is not specified when specifically this messaging took place - so could have been transmitted before Trump's upgrading of tariffs to 104%) and add to the view that China are unlikely to pursue broad currency weakness to combat tariffs, and market/financial stability is the policy priority.
• While the report notes the PBOC asked banks to withhold USD purchasing, and step-up checks on USD buying, this is well short of active selling of USD assets, that have been the source of speculation: Goldman Sachs this week wrote that they see selling of USD assets as a potential option to defend the currency, with market instability a trigger. Their latest estimates have USTs accounting for ~40% of official reserves, or $1.1trl.

German ASWs push higher, which is particularly striking given the selloff in U.S. swap spreads. Last +1.6-4.9bp.

• This further cements the idea of a “sell the U.S.” theme being evident during some of the recent instances of market stress, as U.S. policy uncertainty and the potential long-term rerouting of global trade flows impacts demand for USD assets.
• Note that German long end swap spreads continue to lag on rallies, with the burden of a meaningful increase in German supply over the medium-term continuing to be felt.
• ASW spreads remain below multi-week/month highs seen earlier in the week.