2016, Issue V: Cautious Eye on the Fed and UK Referendum
§ First, US Fed timeline for eventual future rate hike remains data dependent. US growth recovery remains on track but recent global developments out of China and volatile market activity may potentially affect the number of hikes in 2016. Fed officials including Yellen are more hawkish recently. Markets are now expecting 1 Fed hike in 2016; we are expecting 1-2 rate hikes by end 2016. Key US events: ISM Manufacturing Mar (1 Jun) (expected: 50.4); US May NFP (3 Jun) (expected: 160k); Fed Chair Yellen to speak in Philadelphia (7 Jun); US-China Strategic Dialogue (6-7 Jun in Beijing); FOMC meeting, May CPI (16 Jun); May durable goods (24 Jun); 1Q GDP third print (28 Jun).
§ Second, Japan’s 2% inflation target has been pushed back to 2H FY 2017 (by Mar 2018) due to oil softness and slow traction in wage increases. The credibility of Abenomics has waned somewhat in 2016 even though the easing bias is still clear. We do not expect any further moves by the BOJ until Jul meeting at the earliest and further jawboning is likely until then. Postponement of the consumption sales tax hike to Oct 2019 is now very likely, removing a likely drag on the economy. PM Abe will hold a press conference on 1 Jun to announce his decision on holding simultaneous elections for both houses of parliament and on the sales tax hike in Apr 2017. BOJ policy board member Sato speaks in Kushiro on 2 Jun and BOJ deputy governor Nakaso speaks in Akita on 9 Jun and then again to the National Credit Union Association on 24 Jun. BOJ meets on 16 Jun to decide on policy. There is also the final print of 1Q 2016 GDP due on 8 Jun. JGB auctions in Jun: 10-year (2 Jun), 30-year (7 Jun), 5-year (9 Jun), 1-year (14 Jun) and 20-year (23 Jun).
§ Third, we expect ECB to keep monetary policy stance status quo at the upcoming meeting (2 Jun) as ECB is determined to ease financing conditions, stimulate new credit provision in an attempt to reinforce growth momentum and return inflation to medium term objective of 2%. Front-end yield differentials between 2Y Euro and UST bonds widened and may weigh on Euro with some limits. Downside likely to be limited around 1.08 - 1.09 levels. ECB meeting, Apr PPI (2 Jun); 1Q GDP final (7 Jun); May CPI (16 Jun); Jun ZEW survey expectations (21 Jun); Jun confidence indicators (29 Jun).
§ Fourth, China still has excess capacity, heavily indebted corporations and huge liquidity injections continue to add immense pressure on the economy and the yuan medium term. PBOC continues to rely on SLF, MLF and PSL as liquidity tools, we do not rule out interest rate cut of 25bps and RRR to be cut in intervals by another 100bps within the year. Activity indicators (i.e. urban investments, industrial production and retail sales) will continued to be eyed. May PMI-mfg is due on 1 Jun along with Caixin version. The China-US Economic and Strategic dialogue is scheduled on 6-7th. Foreign reserves and trade data are curiously scheduled for release on 7th and 8th respectively. CPI and PPI on the 9th. Activity data will be released on the 12th. Liquidity numbers are due from 10th-15th. We also like to watch Apr industrial profits due on the 27th. We also eye potential inclusion into MSCI and JPM bond indexes.
§ We believe AXJs could see some weakness in 1H of Jun in the run up to the June FOMC. We could see initial broad USD strength in the lead-up to Jun FOMC and potential sell-off thereafter.
 Underlined words represent new developments in the FX themes.