ECB First Monetary Policy Decision Post-Brexit to Kick Off G3 Central Banks’ Meetings in July

18 July 2016

Rates & FX Market Weekly

ECB First Monetary Policy Decision Post-Brexit to Kick Off G3 Central Banks’ Meetings in July

Highlights

¨   Global Markets: In the US, the housing sector will be under the spotlights with the release of Building permits, Housing Starts, Existing Home Sales and HPI; remain mild overweight UST and neutral USD. Over in the UK, investors are likely to keep a keen eye on key data in the week ahead to gauge the preliminary impact of Brexit, particularly June retail sales. Expect the impact of the recent BoE decision to be short-lived, as investors look ahead towards the next MPC meeting a mere 3 weeks away; stay mild overweight Gilts. In Europe, ECB’s first interest rate decision and monetary policy statement after Brexit will be closely scrutinised on Thursday. We opine that QE could possibly be extended while not ruling out a rate cut despite adverse effects on a fragile European banking sector; remain mildly bearish EUR. Over in Japan, little economic data are due this week besides All Industry Index and manufacturing PMI; expect USDJPY to be driven by global sentiment watching 109.30 as next target in a risk-on scenario. Elsewhere, markets are likely to scrutinise the RBA minutes due in the week ahead for any policy inclinations, ahead of the all-important 2Q16 CPI print. AUD is likely to find a stable footing over the near term given receding risks of an imminent Chinese slowdown; remain neutral AUD.

¨   AxJ Markets: Following the array of Chinese data released on Friday which indicated a stronger than expected economic recovery, we expect CNY to find some footing in the week ahead underpinned by modest improvement in confidence; strong data released in July may dampen expectations for PBoC rate cuts in 3Q, pressuring yields on CGBs back towards its 5-month high seen in June. Meanwhile, downward pressure on the USDSGD pair is likely to remain limited over the coming weeks as the moderate 2Q GDP was unable to douse further MAS easing bias, where we see a higher likelihood for MAS to re-centre the SGD NEER lower, underscoring our mildly bearish stance on SGD. Despite the quiet economic calendar in South Korea, we expect volatility on KRW to remain elevated as it continues to take cues from global risk sentiment; eye the next major USDKRW support at 1120 which could begin to test South Korean authorities’ tolerance amid a pullback in JPY. Given the earlier-than-expected rate cut by BNM, CPI due in the week ahead may garner greater attention, where a softer print is likely to underpin further dovish expectations given the current fragile conditions. Foreign reserves data due is unlikely to substantially decline; stay neutral MYR. Turning to Thailand, the low volatility continues to boost attractiveness on THB assets as neighboring AxJ peers continue to reduce rates to boost growth. We remain positioned for another 25bps BoT rate cut in 4Q while political uncertainty is unlikely to be exacerbated ahead of the Constitution Referendum; maintain neutral stance on THB while remaining cautious on duration extension. BI reconvenes on July 21, where we continue to expect a status quo decision ahead of the 2Q16 GDP print and August monetary policy framework recalibration; stay constructive on short-dated IndoGBs. Elsewhere, Indian assets are likely to take cues from global markets in the week ahead, although any affirmation on the new RBI governor is likely to sway domestic sentiment; stay neutral INR and Gsecs.

   

Weekly Positioning

	Rates	FX
Overweight
Mild Overweight	UST, C.EGB, ACGB, Gilts
Neutral	SGS, HKGB, KTB, CGB, MGS, IndoGB, GolSec	USD, AUD, JPY, HKD, MYR, THB, IDR, INR
Mild Underweight	P.EGB	EUR, SGD, KRW, CNY
Underweight	JGB	GBP