South Korean 1Q GDP Dampened by Weaker Domestic Economy; Thai Custom Exports Expanded for the Second Month

26 April 2016

Rates & FX Market Update

South Korean 1Q GDP Dampened by Weaker Domestic Economy; Thai Custom Exports Expanded for the Second Month

Highlights

¨   Global Markets: Demand for the 2y UST auction was average, garnering a BTC of 2.65x and cutoff yields at 0.842% (WI: 0.841%; previous: 2.59x, 0.877%), as investors remained wary ahead of the FOMC meeting. The FOMC statement is unlikely to provide a definitive signal for the committee to hike FFR in June, providing tactical opportunities to add USTs on dips; maintain mild overweight USTs. Meanwhile, weaker German IFO failed to buoy gains on Bunds as ECB’s Draghi signalled his neutral stance after unleashing an aggressive CSPP program. EURUSD climbed 0.32% overnight to 1.1266, where we opine for underperforming economic data out of the EU region to continue weighing on the pair; maintain mildly bearish EUR over the medium term.

¨   AxJ Markets: South Korean 1Q GDP expanded by 2.7% y-o-y (4Q15: 3.1%), dampened by weaker domestic consumption and investments despite the frontloaded fiscal expenditure and consumption tax discounts. With reform packages likely to grind into a deadlock by the new Parliamentary composition, the burden is likely to fall upon BoK to reduce rates by 25bps to boost the domestic economy; remain constructive on short dated KTBs while keeping a mildly bearish stance on KRW. Elsewhere, accelerating food prices remained marginal on Singapore’s CPI, as headline CPI delved lower to -1.0% y-o-y (Feb: -0.8%), driven by lower private car transport costs. Investors shrugged off the lower CPI print, with the USDSGD pair declining lower on the back of weaker USD; expect the pair to remain sensitive to wild swings on USD. Turning to Thailand, customs export rose for the second consecutive month (Mar: 1.3%; Feb: 10.3%), buoying small gains on ThaiGBs across the curve. Appetite for a stronger THB is likely to be limited, with BoT remaining prudent on reserves management amid the softer USD; maintain mildly bearish THB.

¨   JPY clawed back earlier losses, but remained firmly above the 111/USD handle ahead of BoJ meeting later this week. The strong appreciation on JPY remains a hurdle for BoJ in achieving its CPI target, supporting the case for expansion in QQE which could target further increases in ETFs and corporate bonds given the supply dynamics in the JGB market. Keep a cautious stance on JPY ahead of the BoJ meeting on Thursday.