Slightly Hawkish FOMC Stance May Support Upward Momentum on USD

25 July 2016

Rates & FX Market Weekly

Slightly Hawkish FOMC Stance May Support Upward Momentum on USD

Highlights

¨   Global Markets: In the US, despite recent improving US data suggesting a stronger economy towards H2, we opine that FOMC will remain on hold at the July meeting with a slight hawkish stance, as global central banks adopt a wait and see approach and await further data to gauge the Brexit impact in particular. In that sense, preliminary reading for Q2 GDP alongside PCE and Durable Goods Orders will be closely scrutinized by market participants while the USD is likely to benefit from policies discrepancies; remain neutral USD. In Europe, after disappointing German and EU ZEW surveys post Brexit,  further sentiment and confidence readings for the Eurozone will be monitored but preliminary print for EU Q2 GDP will be the most influential on ECB’s future decisions; despite recent muted and rangy movement on the EUR, keep a mildly bearish view on the currency. Over in UK, the release of the 2Q16 GDP print is unlikely to be helpful in gauging Brexit-related impacts ahead of BoE’s closely-watched August meeting. While markets may play down a strong print, given broad consensus that Brexit will hurt short-term growth trajectory, a weak print may fuel additional concerns towards the UK economy post-exit; stay mild overweight Gilts as we maintain our view for a 25bps rate cut in August. Over in Japan, markets look ahead a heavy data calendar (Trade Balance, CPI, IP, Jobless rate) and BoJ’s press conference where governor Kuroda is likely to continue to rule out helicopter money, potentially driving JPY strength, yet balanced by expectations of increased stimulus; remain neutral JPY. Australian 2Q16 CPI release will be a major point of focus for investors and the RBA alike. Consensus estimate calls for headline inflation to soften to 1.1% y-o-y (1Q16: 1.3%), with any negative surprises likely to compel RBA to reconsider its policies in its August meeting; stay mild overweight ACGBs.

¨   AxJ Markets: The quiet economic calendar in China is likely to draw focus on the post G20 official communication to markets alongside signals derived from PBoC Yuan fixings; strong likelihood for the resistance for USDCNY to hold at 6.70, as Chinese authorities keep macroeconomic stability goals high up on their priority list. Meanwhile, expectations for South Korean 2Q GDP and IP print remained fairly modest and are likely to keep BoK receptive towards further easing, particular as uncertainty stemming from Brexit continue to plague export dependent economies. We maintain our mildly bearish stance on KRW as the currency remains sensitive to rapid shifts in risk sentiment; keep a neutral duration view on KTBs. The 20y SGS new issuance is likely to be well received given attractive spreads over USTs of a similar maturity; maintain neutral duration stance on SGS. Also, eye CPI prints for reprieve on the June data which could help to ease but unlikely to eliminate speculations for MAS easing bias over the coming months; keep a mildly bearish view on SGD. In Thailand, exports are expected to decline for the fourth consecutive month in June, exerting pressure on BoT for further easing measures to boost the domestic economy; expect a 25bps BoT rate cut to occur in 4Q, anchoring yields on short dated ThaiGBs. With little economic data releases in Malaysia, Indonesia and India, expect asset movements to take cues from global developments, especially FOMC statement and BoJ decision.

   

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