BoE, RBA & BoT Reconvenes, With the Former Most Likely to Deliver Easing

1 August 2016

Rates & FX Market Weekly

BoE, RBA & BoT Reconvenes, With the Former Most Likely to Deliver Easing Measures

Highlights

¨   Global Markets: Heavy economic data calendar in US, with investors drawn towards PMI and NFP data, where strong prints may provide basis for FOMC to guide the communique towards a FFR hike towards the end of the year; expect a volatile week ahead for USTs as economic data stream in, with a modest bias for UST yields and the USD basket to creep higher over the week. Over in UK, BoE reconvenes for the second time post-referendum, where our view remains for BoE to reduce rates, particularly after BoE hawk Weale continues to communicate a cautious view on the moderating economy. Investors are likely to remain cautious in interpreting July’s PMI while awaiting UK’s triggering of Article 50, limiting any upside gains on GBP; seek opportunities to sell GBP on strength while spreads between 10y GILT and UST may test historical lows of 120bps should BoE’s pre-emptive policies be perceived aggressive. Elsewhere, while EU’s PMI data could provide hints to the bloc’s growth outlook, we expect ECB’s stance to remain fairly provisional over the coming weeks as policy makers continue to decipher the potential impact post-Brexit. As such, we expect developments from political and banking woes from peripheral countries to be a strong catalyst in driving EGBs while strength on USD is likely to be a strong underlying factor influencing the EURUSD pair; maintain mildly bearish EUR. In Japan, weak PMI releases may cast doubts on the underwhelming decision from BoJ MPM, boosting bold speculations for BoJ’s next meeting in September; eye possible reshuffle on the Abe administration. Unwinding of short JPY positions is likely to drive USDJPY to retest BoJ’s pressure point at 100. While underlying CPI remained stable over 2Q16, softer headline inflation and tepid global outlook is likely to keep RBA on the dovish end, with a potential 25bps rate cut anchoring yields on short to mid ACGB tenors.

¨   AxJ Markets: The weak Chinese manufacturing PMI prints are likely to overshadow steady growth in the services sector, supporting lingering expectations for PBoC to ease. While USDCNY retraced modestly from the 6.70 handle, the pair remains vulnerable, underscoring our cautious stance on CNY. Elsewhere, BoK minutes could provide investors with their near term priorities on South Korea’s juggle between financial volatility, growth and support for the country’s restructuring; position for another 12.5bps BoK rate cut, exacerbated by recent outperformance of KRW vs CNY/JPY. Meanwhile, expect another PMI contraction to add to the case for MAS to re-centre the NEER, as global outlook remains plagued by tepid growth and ramifications from Brexit; maintain mildly bearish view on SGD and expect further widening of SGS-UST spreads. In Malaysia, the softer trajectory of oil prices could exert pressure on MYR despite strong appetite for risk assets, underscoring the trailing performance behind KRW, exacerbated by weak exports; remain neutral on MYR. USDTHB remained sticky near 35.0 ahead of BoT MPC, where we expect a status quo decision ahead of the Constitution Referendum. Nonetheless, a 25bps BoT rate cut remains likely to ward off deflationary expectations and ease household and corporate debt burden amid the challenging global outlook. In Indonesia, the easing CPI print could pave the way for further BI rate cuts, with IndoGBs likely to remain supported as the tax amnesty and cabinet reshuffle remain well-received by investors; keep a close eye on USDIDR, poised to break 13,000. Elsewhere, a rebound in Indian PMI prints may bolster confidence, although unlikely to influence governor Rajan's final monetary policy decision as inflation remains sticky; stay neutral INR.

   

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