FFR Hike Probability Climbed to Pre-Brexit Level; Temporary Tax Discounts Boosted South Korean 2Q GDP

26 July 2016

Rates & FX Market Update

FFR Hike Probability Climbed to Pre-Brexit Level; Temporary Tax Discounts Boosted South Korean 2Q GDP

Highlights

¨   Global Markets: Despite higher cutoff yields of 0.760%, demand for 2y UST was soft, garnering a BTC of 2.52x (June: 0.745%; 2.72x). Yields on USTs climbed post auction, with underperformance skewed towards the short endwith FFR futures indicate hawkish FOMC expectations, with probability of a 2016 FFR hike rising to pre-Brexit level of 47.7%. While uncertainty from Brexit is likely to weigh on FOMC’s decisions to raise rates, we opine for the Bank to keep an open mind towards FFR hike this year, underpinned by steady recovery in the domestic economy; remain constructive on USD. German IFO surveys remained resilient, contrasting from weakness seen in Zew post Brexit, suggesting a sanguine near term outlook ahead of UK’s Article 50 trigger, which is expected to take place before 2020; EUR to remain sticky at its 1.10 handle.

¨   AxJ Markets: USDSGD climbed to 1.362 (+0.16%) even as Singapore’s CPI climbed by 0.7% m-o-m (-0.7% y-o-y) buoyed by distortions in the service and conservancy charge rebates seen in May. MAS’s Menon added that current monetary stance remains appropriate, with expectations for headline inflation to climb to positive territory this year; maintain mildly bearish stance on SGD, as uncertainty from CNY is likely to continue to weigh on SGD on top of lingering MAS easing expectations fuelled by weak export demand. Meanwhile, South Korea surprised with stronger than expected 2Q GDP growth of 3.2% (1Q: 2.8%), boosted by extension of temporary tax discounts for car purchases alongside rebound in construction work. KTBs recorded small gains post GDP print, where we expect Brexit to remain a lingering theme in 2H16, positioning for another 12.5bps BoK rate cut over the coming months amid lofty GDP targets.

¨   As we edge closer to the conclusion of FOMC and BoJ July meetings later this week, focus is likely to remain fixated on the USDJPY which has trended higher and held above 105. While a hawkish FOMC could be instrumental in boosting the broad USD strength, it is likely to remain marginal on USDJPY without clarifications from BoJ’s Kuroda on helicopter money and his stance towards further monetary easing; remain cautious on JPY.