UK Political Developments Continue to Cloud Near-term Outlook

29 June 2016

Rates & FX Market Update

UK Political Developments Continue to Cloud Near-term Outlook

Highlights

¨   Global Markets: US final 1Q16 GDP revision was marginally better than expected (1.1% q-o-q saar; consensus: 1.0%), alongside stronger consumer confidence, although lingering global uncertainties are likely to keep the Fed’s cautious towards further rate normalisation; stay mild overweight USTs. Elsewhere, UK political developments continue to remain volatile post-Brexit: i) EU leaders have pushed UK to trigger Article 50 by September, before further EU-UK negotiations would take place; ii) Labour leader Mr Corbyn lost a vote of confidence; and iii) Scotland’s First Minister remains adamant for the country to remain within the EU. These events may potentially set the UK up for a tedious negotiation process, adding on to uncertainties as investors struggle to seek clarity; remain bearish GBP over the short term. Over in Japan, May retail sales fell 1.9% y-o-y (consensus: -1.6%; Apr: -0.9%), and the 3^rd consecutive month of contraction, highlighting the struggle against low potential growth and tepid inflation. Risk aversion flows continue to drive higher JPY, compounding on inflationary woes, as investors continue to add dovish BoJ bets with 40y JGBs dipping below the 0.1% level; stay neutral JPY.

¨   AxJ Markets: The Indonesian parliament approved the tax amnesty bill, resulting in a strong rally for the IDR (+1.22% against the USD) overnight on potential capital inflows and easing fiscal revenue concerns, with BI vowing to absorb any surplus IDR liquidity to prevent excessive currency appreciation. While we are more sanguine towards Indonesia assets on relative carry differentials, improving political climate and economic outlook, high foreign ownership and twin deficits remain overarching concerns as the global outlook turns increasingly fragile; remain neutral on IDR and IndoGBs.

¨   USDINR was unchanged overnight despite a reprieve in global markets, lagging behind AxJ peers. RBI may form its rate-setting monetary panel before August, a positive step in improving the bank’s monetary policy framework, although investors remain cautious ahead of governor Rajan’s sucession plan. Room for further accommodation remains, although rising inflation continues to narrow policy options; stay neutral INR.