Robust Demand for 2y UST Issuance; Uncertain Outlook on EU to Weigh on EUR

25 May 2016

Rates & FX Market Update

Robust Demand for 2y UST Issuance; Uncertain Outlook on EU to Weigh on EUR

Highlights

¨   Global Markets: Demand for the 2y UST new issue was surprisingly robust, garnering the highest BTC YTD at 3.00x with cutoff yield at 0.920% (April: 2.64x; 0.842%), despite overwhelming new home sales print alongside affirmative Fedspeak signaling the prospects for 2-3 FFR hike this year. Additionally, while FFR futures indicated more than 50% odds for FOMC to raise FFR in July’s meeting, we opine for strong auction demand for short dated UST to remain suggestive of some skepticism; maintain mild overweight duration stance on USTs over the near term. Meanwhile, the GBPUSD retraced higher to 1.463 overnight (+0.98%), as BoE’s Carney affirmed BoE’s view that a Brexit “remain” scenario would likely support the case for BoE to gradually raise rates over the medium term. We maintain our neutral stance on GBP, as continual uncertainty stemming from Brexit is likely to limit the upward momentum on GBP over the near term.

¨   AxJ Markets: Singapore’s economy expanded by 0.2% q-o-q, stronger than initial projections of 0.0% (1.8% y-o-y), but failed to buoy the SGD as it remains above the 1.38/USD handle. The challenging external environment is likely to remain a drag on the export dependent economy, where we expect speculations on further MAS easing to resurface towards 3Q16, weighing on SGD; maintain mildly bearish SGD. Elsewhere, despite the strengthening USD, USDCNY remained relatively resilient overnight, following the WSJ article which asserted for PBoC to take a step back on its reform towards a market based exchange rate mechanism. While stability on CNY remains on Chinese authorities’ top priority, we opine for the overvalued REER to remain unconducive for China’s domestic reforms and exports, which could spur a gradual but measured depreciation; maintain mildly bearish CNY.

¨   EUR depreciated by 0.70% overnight against the strengthening USD to 1.114 following mixed economic data out of Germany yesterday. The Zew Survey indicated comfort towards current economic conditions but remain uncertain towards its medium term outlook. This suggests the growing likelihood for ECB to implement further easing measures, which could continue to weigh on EUR; maintain mildly bearish stance on EUR.