All Eyes on BoE’s Decision Ahead of the Summer Lull

4 August 2016

Rates & FX Market Update

All Eyes on BoE’s Decision Ahead of the Summer Lull

Highlights

¨   Global Markets: US ADP came in relatively robust at 179k (consensus: 170k; Jun: 176k), as investors look towards Friday’s key NFP print where more bullish data may add to hawkish Fedspeak signaling December FFR hike. Services data were mixed, with stronger services PMI counterbalanced  by a softer ISM print. DXY managed to claw back some losses from the previous sessions as implied FFR hike probability ticked higher; remain neutral USD. In the EU, services PMI improved on better French and Italian data, although June retail sales failed to climb higher as the bloc struggles to boost growth; stay constructive on core EGBs. While UK services PMI printed in line with the flash estimate (47.4), the contraction in the sector post the EU referendum should remain a concern among investors and the BoE, as the bank reconvenes later. Markets are looking beyond a vanilla rate cut, with any decision to restart asset purchases or non-conventional measures likely to support Gilts; stay mild overweight Gilts.

¨   AxJ Markets: BoT maintained rates at 1.50%, underscored by the gradual economic recovery over the past quarters even as the central bank keeps a keen eye on increased downside risks from the global economy. BoT assistant governor Jantarangs also mentioned the usage of non-rates tools to manage THB volatility, driving USDTHB marginally above its 35.0 handle overnight; stay neutral THB. Elsewhere, USDMYR continued its upward ascend on the dollar’s strength and weak oil sentiment, although a reprieve in oil prices overnight supported mild MYR strength this morning; stay neutral MYR. The Indian upper house cleared the first step towards the implementation of GST, as lawmakers voted favourably to amend the constitution, paving the way towards the tax’s introduction; INR vs lower-yielding FX remains an attractive carry play.

¨   USDJPY climbed 0.33% overnight to 101.26, attributed to the strengthening USD, although the JPY continued to face upward pressure as BoJ’s credibility continues to dwindle. Any material softening in the dollar should have the greatest impact on JPY, pressuring the pair towards the 100 psychological level once again, although we caution against miscalculating BoJ’s ability to deliver surprises; stay neutral JPY.