Muted Market Movements Ahead of US NFP Print Later Today

8 July 2016

Rates & FX Market Update

Highlights

¨   Global Markets: Favourable US ADP and jobless claims were marginal on the USD as investors remain fixated on NFP print due later today; UST yields inched marginally higher by 1-2bps overnight. While a healthy NFP print is likely to buoy strength in the USD, we expect investors to continue downplaying expectations for incremental FFR hikes amid concerns of Brexit on the global economy; maintain mild overweight stance on USTs. Meanwhile, GBPUSD remained in the limelight following its break below the 1.30 support, with UK’s fragile political landscape overshadowing the better than expected UK economic data. We continue to hold a bearish stance on GBP as the lack of concrete blueprints and uncertain economic outlook are likely to weigh on consumer and investment sentiment; expect a BoE rate cut to materialise as soon as its 14 July meeting. Elsewhere, ECB’s minutes indicated concerns for severe repurcussions on EU growth should Brexit materialises, weighing on the fragile growth recovery; remain biased towards core EGBs, with expectations for ECB to preserve its dovish bias over the coming months.

¨   AxJ Markets: PBoC’s enforcement of reserve requirement on FX forwards in China by offshore banks alongside a surprise increase in China’s foreign reserves in June to USD3.205trn (May: USD3.192trn) remained marginal on CNY, with the USDCNY pair lingering at its 5-year high of 6.68. Our medium term view on CNY remains tilted towards a mildly bearish stance, as weak traditional growth drivers could continue to fuel apprehension, spurring further capital outflows. Meanwhile, KRW appreciated 0.95% to 1155/USD ahead of US NFP later today, where we remain of view for USDKRW to remain the most vulnerable out of the AxJ bloc, given its high beta and potential capital outflows amid concerns of tightening US-Korea interest rate differentials.

¨   S&P revised Australian rating outlook to negative amid concerns on the elevated level of external debts. Although the Coalition appears increasing likely to garner the 76 seats needed for parliamentary majority, easing the political uncertainty, threats of further RBA easing, CNY volatility and sluggish Chinese growth are likely to weigh on AUD, underscoring our mildly bearish stance over the medium term.