Upcoming EU Referendum Continue to Dominate Risk Sentiment

15 June 2016

Rates & FX Market Update

Upcoming EU Referendum Continue to Dominate Risk Sentiment

Highlights

¨   Global Markets: 10y UST yields dipped to an intraday low of 1.565% on Brexit concerns before retracing higher to 1.613%; yields found support during the US session, likely on technical buying below the 1.60% support, underpinned by stronger retail sales numbers (0.5% m-o-m; consensus: 0.3%). The FOMC decision is due later today, where we expect the committee to strike a slightly more cautious tone although reaffirming their commitment towards higher US rates; eye potential revisions to US economic assessment and the dot plot. In the UK, GBPUSD tested the 1.41 level overnight on rising Brexit odds, where FT poll tracker indicated a 3ppt lead by the “exit” camp (9% remain undecided), compounded by one major UK newspaper voicing support towards a “Brexit”. GILT yields dipped 2-7bps overnight on heightened event risk and rate cut prospects, where we stay neutral on both GILTs and GBP ahead of the June 23 referendum. Elsewhere, risk-off flows have further compressed core EGB and ACGB yields, with 10y Bund yields dipping into negative territory; stay mild overweight core EGBs and ACGBs.

¨   AxJ Markets: While South Korean unemployment rate dipped to 3.7% in May (Apr: 3.8%), growth remains pressured by tepid external and domestic demand, with any chance of additional fiscal stimulus remaining challenging given the ruling party’s recent election setback; maintain mildly bearish stance towards KRW. Elsewhere, Indian WPI ticked higher to 0.79% y-o-y in May (Apr: 0.34%) following the higher-than-expected CPI print, compounding on India’s resurgent price woes. Given recent gains in oil prices, RBI may find it increasingly difficult to deliver another headline rate cut in the coming meetings; remain neutral GSecs, with liquidity support from RBI alongside relatively attractive yields potentially limiting any fallout from higher inflation.

¨   USDCNY climbed 0.17% higher overnight to 6.5970 on broad USD strength, the highest level in 5 years. The pair climbed to an intraday high of 6.6034/USD this morning, after lower PBoC CNY fixing (6.6001/USD) and MSCI’s decision not to include Chinese A-shares into its EM index. We remain mildly bearish on CNY given the deteriorating economic outlook, with PBoC retaining its grip on China’s FX regime.