Upward Momentum on GBP Supported by Declining Brexit Likelihood

27 April 2016

Rates & FX Market Update

Upward Momentum on GBP Supported by Declining Brexit Likelihood

Highlights

¨   Global Markets: Yields on USTs maintained their upward crawl, with 2y yields back towards the 0.90% handle ahead of FOMC rate decision tonight amid stronger services PMI data and another mediocre 5y tailed auction (HY:1.410%; WI: 1.408%; BTC: 2.41x). Given expectations for a low likelihood of any FFR hike tonight, we eye the tone of the statement for clues towards FFR hike in June, where any indications of declining global risks may translate to a higher likelihood of tightening in June. Over in UK, recent polls have suggested a declining likelihood of a Brexit, supporting tenacious strength in GBP over the past week to 1.458/USD (+0.66% overnight). We expect a healthy UK 1Q GDP print released in the day ahead alongside corroborating findings from other polls to spur unwinding in GBP hedges and boost further strength in the sterling over the near term.

¨   AxJ Markets: Stronger than expected Singapore industrial production print failed to support strength on SGD, with the USDSGD pair mostly unchanged overnight at 1.3516 despite a softer USD. Yields on SGS also surged higher by 4-7bps across the curve yesterday, with the belly tenors attributing to the bulk of trading volume as investors repositioned ahead of the 7y off-benchmark SGS auction later today; keep a cautious stance on SGS, given its sensitivity towards wild swings on USD following the FOMC meeting. Although declines in the pace of Hong Kong exports eased to -7.0% (Feb: -10.5%), attention on the city’s trade data was fixated on the discrepancy with its mainland China, diminishing optimism on China’s external demand recovery. Additionally, PBoC’s daily yuan fixings remained prudent over the past weeks, where we remain biased towards a mildly bearish CNY over the medium term.

¨   Despite the election upset, foreign inflows into South Korea persisted, supporting strength in both the equity and bond markets. However, deadlock within the Parliament is likely to place the burden on BoK to ease rates this quarter, where we reiterate our preference to position for a mildly bearish KRW, targeting 1240/USD by YE16, driven by yield seeking behaviour within the emerging AxJ region.