New YTD Highs in Commodity Prices Underpinned Strong Risk Sentiment

21 April 2016

Rates & FX Market Update

New YTD Highs in Commodity Prices Underpinned Strong Risk Sentiment

Highlights

¨   Global Markets: UST yields and DXY climbed 4-6bps and 0.55% overnight respectively, as new YTD highs in commodity prices (i.e. oil, iron etc) lifted sentiment; dovish FOMC bets likely to recede over the coming weeks if signs of global stabilisation strengthen. Nonetheless, we opine for FOMC to stand pat in the week ahead, with any additional hawkish dissents to fuel rate hike speculations in June, although FFR trajectory is likely to stay gradual; remain neutral towards USD. Over in UK, 3M/3M employment gains (20k; consensus: 60k) and wage growth including bonuses (1.8% y-o-y; consensus: 2.3%) printed below expectations, weighing on UK inflation trajectory; GBPUSD fell 0.43%, although this was in line with EUR declines. BoE’s McCafferty highlighted that while global gyrations and tepid wage growth dampened his initial hawkish outlook, recent macroeconomic stabilisations may warrant a tightening over the coming months; we remain neutral GBP in view of Brexit-related volatility.

¨   AxJ Markets: Malaysia CPI printed surprisingly soft (2.6% y-o-y; consensus: 3.4%), driven by a sharp decline in transportation prices (-8.2% y-o-y) on lower fuel prices. Recent rebound in MYR and softer domestic demand are likely to keep headline inflation manageable, potentially spurring easing speculations towards 2H16, although we hold our view for BNM to stand pat through 2016; stay neutral MGS. In Indonesia, USDIDR remains unchanged despite higher commodity prices ahead of BI’s decision later today, where we opine for a status quo decision in view of the upcoming transition to deploy the 7D repo rate as the new policy rate. BI is likely to remain accommodative amid manageable inflation, supporting economic and credit growth, where the Financial Services Authority already expects 2Q16 loan growth rebounding higher to 12-14%; stay neutral IDR.

¨   USDINR fell 0.5% to 66.22 yesterday after FX markets were shut on Tuesday, as recovering risk appetite continue to support gains in riskier assets.  Reports that RBI would avoid competitive devaluation to support exporters alongside potential foreign inflows into Indian assets are likely to support INR strength, gains are likely to remain subdued vis-à-vis higher-beta and/or commodity-linked FX; stay neutral INR.