Swift Downgrades on UK Sovereign Rating to AA Compounded on the Weak Sentiment

28 June 2016

Rates & FX Market Update

Swift Downgrades on UK Sovereign Rating to AA Compounded on the Weak Sentiment

Highlights

¨   Global Markets: S&P and Fitch has downgraded UK’s sovereign rating by 2 notches and 1 notch respectively, bringing the sovereign rating to AA following the EU referendum, citing concerns on institutional quality, risk of deterioration in external financing conditions, and possible occurance of Scottish independence impacting the political climate. Decline in GBP against major currencies persisted yesterday, bringing the GBPUSD pair back to its 1985 lows, as inaction from “Leave” camp officials continue to weigh on sentiment, driving the GBPUSD to test its 1.30 psychological resistance; maintain bearish on GBP. Meanwhile, safe haven assets continued to benefit, with yields on 10y edging lower by 12bps overnight to 1.44%, last seen in 2012; expect 10y to test the 1.40% all time low over the coming weeks as ramifications from Brexit continue to filter through the global economy.

¨   AxJ Markets: South Korea has downgraded its 2016 GDP target from 3.1% to 2.8% while implementing a supplementary budget of KRW10trn to support the fragile economic recovery weighed by the corporate restructurings and weak external demand. In view of Brexit, we see a higher likelihood now for BoK to reduce rates by another 12.5bps over the coming quarter, which should continue to favour short dated KTBs; maintain mildly bearish stance on KRW as the currency remains heavily influenced by external gyrations. Elsewhere, Thai’s PM Prayuth has downplayed concerns of political uncertainty, reiterating his commitment to the Junta even if Thai voters reject the Constitution draft in the upcoming referendum held in August. Healthy domestic and offshore demand for ThaiGBs are likely to keep yields anchored, easing pressure off BoT to reduce rates in 3Q; maintain short duration bias on ThaiGBs while we continue to keep our neutral stance on THB given its low beta and strong reserves management.

¨   Indonesia has approved revisions made to the 2017 budget, with an oil assumption of USD40/bbl, a fiscal deficit of 2.35% of GDP, and GDP growth target of 5.2%. Additionally, meaningful steps towards the approval of the tax amnesty bill also supported optimism in the region, driving the USDIDR pair lower to 13,351 (-0.30%) despite the risk off sentiment overnight; maintain neutral stance on IDR over the medium term.