Propensity for Further RBA Easing to Remain

5 July 2016

Rates & FX Market Update

Propensity for Further RBA Easing to Remain

Highlights

¨   Global Markets: Market movements were relatively subdued overnight as US financial markets were closed in observance of Independence Day, ahead of a busy week with June FOMC minutes and NFP data due. Over in Europe, Italian banking woes deepened after ECB demanded Monte dei Paschi, Italy’s 3^rd largest bank by assets, to reduce its NPL portfolio over the next 2 years. The Italian government continues to ponder unilateral aid for its banks and sidestepping EU banking recapitalisation rules; we remain bias towards core EGBs versus peripheral ones despite wide valuation differences. Elsewhere, the AUD climbed 0.96% overnight, reversing earlier losses due to an inconclusive electoral result while a private inflation gauge revealed prices climbed 1.5% y-o-y in June (May: 1.0%). RBA reconvenes later today, where we eye the post-meeting statement on any shifts in rhetoric following Brexit ramifications; stay mild overweight ACGBs, with another rate cut likely over the coming months.

¨   AxJ Markets: PBoC fixed the USDCNY at 6.6594 this morning, continuing its upward trend, where we expect continued gradual depreciation in the currency over the medium term as PBoC delivers incremental RRR and rate cuts over 2016 to support mounting downward economic pressures, underpinning further capital outflows; sharp CNY movements remain unlikely as officials continue to prioritise FX stability. Over in Singapore, falling PMI numbers (Jun: 49.6; May: 49.8) continue to indicate mounting economic challenges for the export-dependent city state. Amid accommodative global monetary policies, sluggish external demand and potential Chinese economic slowdown risks, we expect MAS easing bets to linger on ahead of the October meeting, where the next move is likely to be a re-centering of the SGD NEER band; stay mildly bearish SGD.

¨   UKIP leader Nigel Farage abruptly resigned, in the latest political volatility in the UK post-Brexit, as all major political parties struggle with leadership challenges. BoE is widely expected to deliver easing as early as next week when the bank reconvenes on 14^th July, amid a highly uncertain economic outlook over the short-term as the process for an UK exit from the EU remains an unknown; stay bearish GBP.