27 July 2016
Rates & FX Market Update
FOMC Expected to Signal Receptiveness But Not Commitment Towards FFR Hike This Year
¨ Global Markets: Average demand was seen for the 5y UST auction yesterday, which garnered a BTC of 2.27x with cutoff yields at 1.180% (June: 2.29x; 1.218%). Notably, yields on 2y UST inched higher ahead of FOMC rate decision later today buoyed by strong new home sales and consumer confidence, underscoring investors’ expectations for FOMC to signal its receptiveness towards a FFR hike this year; remain constructive on USD as the diverging monetary policies between FOMC and global central banks remain in keen play through the coming months. Meanwhile, JPY appreciated sharply to 104.7/USD yesterday as Finance Minister Aso asserted the independence of BoJ while reports of smaller than expected fiscal stimulus amounting to only JPY6trn, of which, only JPY2trn constitutes to the supplementary budget. USDJPY is likely to remain in its consolidative phase ahead of BoJ MPC, where clarifications from BoJ’s Kuroda is likely to be pivotal to the USDJPY pair.
¨ AxJ Markets: Weighed by the weakening pharmaceutical sector, Singapore’s IP declined 0.3% y-o-y (June: 0.9%), with expectations for weak external export demand is likely to continue to weigh on IP over the coming months. USDSGD declined on the back of the softer USD overnight, where we expect the pair to find a strong support at 1.35, bolstered by increasing concerns for the export oriented economy, pressuring MAS to explore easing options in October. Meanwhile, Hong Kong’s decline in exports eased in June amid tepid demand alongside rising uncompetitiveness of HKD vis-à-vis its regional peers. Additionally, the discrepancy between Hong Kong and China trade data continued to induce investors’ concerns on the possibility of massive fake trade invoicing, which could mask the extent of capital outflows from China.
¨ BoE hawk, Weale, shifted towards the dovish stance, stating his preference for immediate monetary stimulus following last week’s disappointing PMI, driving the GBPUSD towards an intraday low of 1.306 yesterday. Concerns of cost push inflationary factors is likely to be overshadowed by medium term growth concerns, which could pressure GBPUSD to test its 1.30 support as BoE reconvenes next Thursday.