29 July 2016
Rates & FX Market Update
Brexit Uncertainty Weighed on Consumer Sentiment, Fuelling BoE Rate Cut Views in the Week Ahead
¨ Global Markets: Modestly higher jobless claims did little to sway sentiment on USTs, with movements on the curve remaining relatively subdued post FOMC statement. Decent demand was seen for the 7y UST issuance which garnered a BTC of 2.51x despite a lower cutoff yield and coupon of 1.340% and 1.250% respectively (June: 2.56x; 1.497%; 1.375%) as FOMC appeared to provide little signals towards an imminent rate hike over the coming quarter, underscoring our mild overweight stance on USTs. Meanwhile, GBP underperformed despite the softer USD overnight, with the sharpest drop of GfK Consumer Confidence in more than 26 years reigniting Brexit concerns, fueling speculations towards a 25bps a BoE rate cut in the week ahead; remain positioned to sell GBP on strength.
¨ AxJ Markets: Singapore’s unemployment rate climbed to 2.1% in 2Q (1Q: 1.9%), with the services sector accounting for the bulk of the layoffs (62%). Expectations for a sluggish economic outlook alongside increasing global risks could continue to exert pressure on the economy, fueling speculations for MAS to re-centre the SGD NEER in October; maintain mildly bearish SGD. Turning to South Korea, IP posted a soft growth of 0.8% y-o-y in June (May: 4.7%), compounding on the optimism within the market following the release of stronger than expected 2Q GDP growth. However, KTBs continued to post strong gains, with 10y UST-KTB spread sustaining its 6-month high of 13bps on further easing expectations; maintain neutral stance on KTBs. Elsewhere, Thailand’s manufacturing output climbed for the fourth consecutive month but remained constrained by the tepid external demand; maintain neutral view on THB with expectations for political uncertainty to remain contained amid the Constitution Referendum.
¨ Strong appetite for risk assets following the release of FOMC statement spurred sharp appreciation on KRW to its 9-month high of 1125/USD. With CNY, the currency of its largest trade partner, testing new lows and expected to continue depreciating over the medium term, the strong performance on KRW is likely to erode the attractive of South Korean exports, further exerting pressure on the sluggish economic recovery.