Easing Bias from Major Central Banks Globally to Support Broad USD Strength

21 July 2016

Rates & FX Market Update

Easing Bias from Major Central Banks Globally to Support Broad USD Strength

Highlights

¨   Global Markets: A modest rebound on oil prices from its 2-month low buoyed risk sentiment, driving yields on 10y UST higher to 1.58% overnight (+3bps). While we expect FOMC to hold rates next week with a modestly hawkish tilt, we continue to reiterate our mild overweight stance on USTs, as FOMC members are likely to continue to err on the caution side, which could support strong demand for safe haven assets amid bouts of weak data over the coming months. Additionally, easing biases from ECB, BoE, BoJ, RBA, and RBNZ are likely to remain supportive of the broad USD, driving it to test its recent highs sustained in 1Q16; remain constructive on USD. Over in UK, optimism stemming from lower unemployment rate and higher weekly earnings recorded in May supported a strong rally on GBPUSD, with the currency rising to 1.3235 overnight (+0.99%). However, the economic data continued to be reflective of pre-Brexit circumstances, underscoring our view to sell the GBP on strength as Brexit continues to place heavy pressure on further easing to cushion the moderating growth momentum over the coming months.

¨   AxJ Markets: Malaysian CPI eased to 1.6% y-o-y in June (May: 2.0%), dampened by declines in transport, communication, and clothing & footwear, suggesting challenges faced by softening domestic demand which supported BNM’s recent rate cut decision. Maintain neutral stance on MYR, as carry on MYR assets are likely to balance BNM’s accommodative bias. Elsewhere, USDCNY tested but failed to hold above its 6.70 resistance as stronger PBoC daily Yuan fixings guided the currency stronger ahead of the G20 meeting held in China. Meanwhile, flood damages are likely to exert downward pressure on 2H16 growth, where we expect swift fiscal and monetary responses from China to safeguard the medium term GDP target; remain constructive on CGBs.

¨   Increasing speculations for Japan to issue perpetual government bonds drove the USDJPY pair to its 1-month high of 107.20 (+0.98% overnight), threatening to break the critical resistance at 109.30, a level last seen before Brexit. Keep a cautious stance on JPY as increasing risk appetite amid expectations for further easing from ECB and BoJ likely to dull demand for the safe haven currency.