Fed’s Yellen Cautious Tone Undermined Likelihood of FFR Hike in 1H16

30 March 2016

Rates & FX Market Update

Fed’s Yellen Cautious Tone Undermined Likelihood of FFR Hike in 1H16

Highlights

¨   Global Markets: USD slumped by 0.82% against major crosses overnight, following Fed’s Yellen’s speech which indicated that the challenging global outlook could undermine the likelihood of a FFR hike in April or June FOMC meetings, effectively disputing optimistic Fedspeak from Fed’s Bullard, Harker, and Lockhart. Fed’s Yellen cautious tone also triggered strong gains in USTs, with yields declining 6-10bps across the curve alongside a prompt revision in the FFR futures indicating 0% and 28.0% probability for a rate hike in April and June meetings respectively (previous: 6.0% and 38.0%). We affirm our mild overweight stance on USTs, with anticipation for the softer than expected 1Q US GDP print to exacerbate Fed’s cautious approach.

¨   AxJ Markets: USDMYR broke the 4.00 support, as S&P affirmed Malaysia’s foreign and local currency ratings, citing strong external position and adequate monetary policy maneuverability as strengths underscoring the sovereign’s stable rating outlook; maintain neutral stance on MYR. Elsewhere, robust demand was seen for the 2y SGS, garnering a BTC of 2.25x despite lower cutoff yields at 0.96% (previous: 1.86x; 1.45%), buoyed by the strengthening SGD. Further corrections on the broad USD could continue to drive the USDSGD pair lower, where we eye 1.345 as the next major support level; maintain neutral on SGD. Meanwhile, the Chinese state council has approved for 2 new members for PBoC committee, Liu Shiyu and Ning Jizhe, which replaces Xiao Gang and Wang Baoan, with both expected to hold dual roles, in addition to their CSRC chairman and Statistic Bureau Head appointments. Ahead of key Chinese data due later in the week, we continue to position for another 50bps PBoC rate cut through 2016, as the government seeks to push through its reform plans amid decelerating growth in its traditional growth drivers.

¨   Japanese government approved the JPY96.7trn budget, with PM Abe refuting rumours of a fiscal stimulus package and asserting for April 2017 sales tax hike to proceed as planned, supporting overnight gains on the JPY to 112.73/USD (+0.59%). While plans to frontload the budget is mildly constructive for the growth, weak price pressures are likely remain a compelling reason for BoJ to ease further; maintain mildly bearish JPY.