ECB Delivered No Surprise Although Easing Bias Remains

22 April 2016

Rates & FX Market Update

ECB Delivered No Surprise Although Easing Bias Remains

Highlights

¨   Global Markets: Even as bullish momentum on oil prices stalled, UST yields continued to edge 1-2bps higher overnight as initial jobless claims fell to 247k (consensus: 265k). High likelihood remains for another status quo FOMC decision in the week ahead where we turn to the FOMC statement for fresh insights on Fed’s economic assessment; remain mild overweight USTs, with 10y yields approaching 2% opening up tactical long opportunities. Elsewhere, ECB held policies in line with our expectations, where the bank revealed details of its upcoming corporate bond purchase program. However, ECB’s dovish message remains that further measures can be deployed if inflation continues to disappoint. EURUSD closed marginally weaker overnight, although EGB yields were mostly higher as dovish expectations were not met; remain mildly bearish towards EUR. Over in UK, March retail sales ex-fuel printed below expectations (1.8% y-o-y; consensus: 3.8%) alongside downward revision in the February print, weighing on growth and inflation concerns; stay neutral GBP ahead of the June referendum.

¨   AxJ Markets: Bank Indonesia held policy rate at 6.75%, in line with consensus and our expectations after a cumulative 75bps cut year-to-date, and ahead of the planned recalibration of the benchmark rate to the 7D reverse repo rate (5.5% currently, effective 19 August); the rate corridor was kept unchanged at 75bps. The recalibration is likely to improve monetary policy transmission, underpinning stronger loan growth over 2016 (estimated 12% y-o-y; Feb 2016: 8.2%). BI remains optimistic over the domestic economy, with 1H16 growth likely to accelerate on increased government spending while inflation is expected to remain within the 3-5% target range; we stay neutral IDR, with BI unlikely to ease during the transition period.

¨   USDINR climbed 0.26% overnight alongside most AxJ currencies which tumbled against USD on the latter’s strength. While INR performance remained muted YTD despite the economy’s resilience, we identified near-term risks that could weigh on the currency into 3Q16, notably a persistent sharp rally in oil prices alongside RBI Rajan’s succession plan when his term expires in Sep 2016; stay neutral INR.