ECB Upgraded 2016 Economic Forecasts; CSPP to Begin on June 8

3 June 2016

Rates & FX Market Update

ECB Upgraded 2016 Economic Forecasts; CSPP to Begin on June 8

Highlights

¨   Global Markets: US ADP came in within expectations (173k) alongside a slight upward revision in the previous reading, which could help to moderate NFP expectations due later today. Fed’s Kaplan also reiterated FOMC’s rhetoric towards a FFR hike over the near term, citing healthy US consumer sector and an economy close to full employment; FFR futures indicated a better probability of a FFR hike by July (>50%); remain constructive towards USTs over the medium term. Over in EU, ECB kept monetary policies unchanged as expected, and will begin to purchase corporate bonds on June 8 while reassuring market participants that the bank will be mindful of the impact on liquidity. ECB also upgraded its 2016 GDP and CPI forecasts to 1.6% and 0.2% respectively (previous: 1.4%; 0.1%), dulling prospects of further actions over the near term despite lingering deflationary threats; we upgrade our stance on EUR to neutral. In Australia, trade deficit improved on a trailing 12m basis, although retail sales disappointed (0.2% m-o-m; consensus: 0.3%); ACGB yields fell c.3bps overnight, where we reiterate our mild overweight stance.

¨   AxJ Markets: S&P’s decision not to upgrade Indonesia’s BB+ credit rating, alongside an upward revision to the 2016 fiscal deficit to 2.48% of GDP (previous: 2.15%), drove IndoGB yields 2-5bps wider overnight. The government proposed to revise the USDIDR, CPI and oil price assumption to 13,500/USD, 4% and USD35/bbl respectively (previous: 13,900, 4.7%, USD50/bbl), appearing reasonable and prudent in our opinion; we maintain our neutral IDR stance. Over in India, the government maintained its silence over the prospect that incumbent RBI governor Rajan will not stay on for the 2^nd term, possibly weighing on INR sentiment ahead of the June’s FOMC meeting; stay neutral INR, although we remain watchful of potential bouts of volatility.

¨   USDMYR was relatively unchanged overnight, although the pair traded in a volatile manner this morning between 4.1385–4.1530 ahead of trade data due later today. Brent oil prices surged past USD50/bbl once again, and investors are likely to eye any convincing breakout to support prices above the 50 handle, which will likely provide some support to the MYR, although the impending June FOMC remains a risk; stay neutral MYR.