FOMC Meeting to Set Tone for Global and Asian Markets

13 June 2016

Rates & FX Market Weekly

FOMC Meeting to Set Tone for Global and Asian Markets

Highlights

¨   Global Markets: Most anticipated in June, FOMC meeting may give indication to the timing of the interest rate hike. We opine that rates will remain unchanged given recent disappointing May NFP and uncertainty from the EU referendum. We also do not expect a rhetoric change as at least 2 months of job prints would be observed to assess the strength of labour market as well as preliminary 2Q16 GDP growth due later in July. Remain mild overweight UST and neutral USD. In Europe, while 10y Bund yield is making new lows, ECB’s Draghi speech on Friday will be closely scrutinized as scepticism over unchartered NIRP is rising among investors and banks. Economic data will also be watched (Trade Balance, IP, Employment and CPI) to gauge the pace of economic recovery, while optimism continue to be fueled by ECB’s CSPP. ECB to remain on hold; remain neutral EUR and mild overweight EGBs. Over in UK, volatile movements on risk assets to persist as the EU referendum draws closer, while top tier data: CPI, unemployment, wages and retail sales are due. BoE reconvenes where the bank may reiterate the economic downside risks if the “Brexit” camp prevails, with no chance of any policy shift; stay neutral GBP and GILTs. BoJ reconvenes where we expect policies to remain on hold; USDJPY testing the 105 mark will continue to weigh on future BoJ’s decisions. In Australia, investors are likely to keep an eye on labour data due, where any strength are likely to dampen RBA easing expectations, although the numbers are volatile on a m-o-m basis; stay neutral AUD, with potential dollar softening and stabilisation in commodity prices counterweighed by RBA’s propensity towards further easing.

¨   AxJ Markets: Following the blip in April’s Chinese aggregate financing, views remained diverse on authorities’ stance towards curbs on excessive credit; another modest aggregate financing print could ease doubts on the authorities’ resolve but compound on growth concerns. Eye FOMC tone, with a hawkish surprise likely to drive the USDCNY back to its 6.585 resistance; decent demand expected for 7y CGB auction. Turning to South Korea, the unemployment rate is likely to be thrusted back into the spotlight amid the industrial restructuring, compounding on already fragile labour market stemming from the persistently high unemployment rate amongst the aged 15-29. Despite the low likelihood for another BoK rate cut, we expect short dated KTBs to remain anchored amid the sluggish pace of structural reforms and economic recovery; maintain mildly bearish KRW. Meanwhile, another consecutive decline in NODX could limit gains on SGD beyond the 1.34/USD resistance; keep a mildly bearish tilt on SGD. Over in Hong Kong, the wide spread between the 10y HKGB and UST at c.50bps remains noteworthy, where we see value in an outright long for 10y UST vs 10y HKGB should spread breaches the 55bps mark. In Thailand, the risk-on sentiment is likely to be supportive of both the 5y and 20y ThaiGB auction, but we continue to caution investors on exposure towards the long end of the curve. In Malaysia, inflation is likely to remain anchored; a dovish Fed should underpin further improvements to sentiment, supporting Malaysian assets amid elevated volatility; stay neutral MGS. While conditions are favourable for BI to ease rates further, underpinned by benign inflation and IDR stabilisation, we maintain our view for a status quo rate decision ahead of August’s policy recalibration, where the focus remains towards improving interest rate transmission and macro prudential measures to support loan growth; stay neutral IDR. Over in India, CPI and WPI are likely to creep higher in May on seasonal factors, constraining RBI’s ability to ease rates further even as the bank remains relatively confident towards a contained inflation environment. Trade balance is also expected to widen in May, with further downside risks due to seasonality; stay neutral INR.

   

Weekly Positioning

	Rates	FX
Overweight
Mild Overweight	UST, C.EGB, ACGB
Neutral	GILT, HKGB, MGS, SGS, KTB, P.EGB, CGB, IndoGB, GSec	USD, JPY, HKD, INR, GBP, MYR, IDR, AUD, THB
Mild Underweight	ThaiGB	EUR, SGD, KRW, CNY
Underweight	JGB