Markets at Crossroads Ahead of EU Referendum

20 June 2016

Rates & FX Market Weekly

Markets at Crossroads Ahead of EU Referendum

Highlights

¨   Global Markets: The week ahead could be a turning point for global sentiment, as investors focus on the key event – the EU referendum on 23 June. Expect the first regional results to hit wires on Friday after 6AM (GMT+8), with the final results likely due in afternoon Asian trading; expect movements to remain extremely volatile given the tight race. While our base case remains for UK to stay in the EU, the binary nature of the referendum and the significant proportion of fence sitters (c.10%) continue to introduce a high degree of uncertainty; stay neutral Gilts and GBP. In the US, market participants are likely to focus on Fed Yellen’s testimony to the Senate, and subsequently the June FOMC minutes and employment due early July; markets to stay cautious as 10y yields do not appear attractive just above the 1.50% support. Elsewhere in Europe, the week is also likely to be punctuated by the EU referendum, while ECB is already communicating on its contingency planning to avoid liquidity shortages in case of Brexit; remain mildly bearish EUR. In Japan, safe asset JPY has continued to drift higher en route to the critical 100/USD level, likely to exert pressure on the export sector and increase prospects of further easing measures. Over in Australia, RBA minutes due are likely to shed further insights to the bank’s economic assessment and willingness to ease policies further, as the pace of labour improvement slows; stay neutral AUD.

¨   AxJ Markets: The deferment of FOMC’s rate normalisation is likely to continue offering Asian economies the window to ease monetary policies, where we see a high likelihood for BoT to pre-emptively reduce rates by 25bps, taking a leaf from BoK and BI’s book; remain constructive on short dated ThaiGBs. Over in China, the quiet economic calendar is unlikely to draw interest away from the USDCNY pair, which continues to test the 5-year high; keep a mildly bearish bias on CNY over the medium term as Chinese authorities continue to seek a fine balance between deleveraging and medium term growth. Elsewhere, South Korea’s corporate industrial restructuring continues to dampen sentiment amid the sluggish growth momentum, while we remain concern on the current political impasse. While we see a low likelihood for BoK to ease further, the weak economic growth is unlikely to fully douse rate cut bets, keeping yields on KTBs anchored near its all-time lows. Meanwhile, a deeper decline in Singapore’s CPI could add to the case for MAS to ease further in the upcoming October MPS, limiting the pace of SGD appreciation against the backdrop of USD weakness; expect 1.34 to be a major resistance for SGD. Over in Malaysia, foreign reserves print should remain broadly stable, with movements in Malaysian assets highly dependent on external catalysts; stay neutral MYR. In Indonesia, the parliament will debate over the proposed tax amnesty bill, a crucial revenue source projected under the revised budget plan. Failure to secure a credible amnesty bill may further threaten the viability of the plan; stay neutral IndoGBs. On no economic releases in India, expect asset movements to remain driven by sentiment ahead of the EU referendum.

   

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