Temporary Pause in EU Referendum Campaigning Dampened Risk Aversion Flows

17 June 2016

Rates & FX Market Update

Temporary Pause in EU Referendum Campaigning Dampened Risk Aversion Flows

Highlights

¨   Global Markets: BoE unanimously held policy rate as expected, although the GBPUSD came under pressure initially towards the 1.40 psychological level on Brexit apprehensions. The fatal shooting of a pro-remain lawmaker prompted a temporary suspension of campaigning on both sides, spurring a relief rally in the cable; stay neutral GBP. The suspension also spurred a recovery in global risk sentiment, with 10y UST yields declining 0.7bps overnight to 1.579% after climbing from an intraday low of 1.519%. US May headline CPI came in a touch weaker (1.0% y-o-y; consensus and April: 1.1%), although core CPI was firmer at 2.2% y-o-y (Apr: 2.1%). We reiterate our neutral stance towards USD, as US rate trajectory remains under pressure on a cautious Fed and lingering global macro risks. Over in Japan, BoJ maintained the status quo as expected, driving the USDJPY 1.57% lower overnight. We still expect BoJ to deliver further easing measures over the coming months as the 2% CPI target remains distant; stay neutral JPY. Elsewhere, while Australian May employment exceeded expectations (17.9k; consensus: 15k), the April print was revised 10k lower; we remain biased towards further RBA rate cuts over the coming months, and remain mild overweight ACGBs.

¨   AxJ Markets: Singapore NODX climbed 11.6% y-o-y in May (consensus: -1.6%; Apr: -7.9%), driven by non-electronic exports such as pharmaceuticals and pre-fabricated buildings. Amid challenging economic conditions, we eye an increasing likelihood for MAS to ease policies in the October meeting, supporting our mildly bearish call towards the SGD. Over in Indonesia, BI unexpectedly delivered a 25bps cut to its benchmark rate and 7D Reverse Repo Rate, and eased macroprudential measures relating to loans, given subdued inflationary pressure and the need to stimulate economic growth; stay constructive on short-dated IndoGBs.

¨   USDINR climbed 0.19% overnight to 67.29/USD, after 1Q16 CA deficit narrowed to USD0.3bn (4Q15: USD7.1bn), although underperformed consensus expecting a surplus. While accelerating inflation and uncertainties surrounding RBI’s Rajan reappointment are likely to introduce systematic risks in INR movements, we remain of the view that FX volatility will be relatively contained versus AxJ EM peers; stay neutral INR.