EU PMI Expansions to Bolster Short Term Gains on EUR

23 August 2016

Rates & FX Market Update

EU PMI Expansions to Bolster Short Term Gains on EUR

Highlights

¨   Global Markets: UST curve bull flattened modestly despite the quiet US economic calendar, as the sharp overnight decline in Brent oil prices (-3.38%) buoyed demand for safe haven assets. Fed’s Fischer highlighted the distinctions between short term outlook and long run issues, which bolstered support for the hawkish camp in FOMC; maintain tactical mild overweight USTs but keep a keen eye on Fed’s Yellen Jackson Hole speech which might suggest shifts in perspectives, paving the way for a December rate hike. Meanwhile, similar gains were seen on EGBs, with yields on 10y Bund declining by 6bps to -0.09% yesterday, clawing back prior day’s losses; strong expansions in PMI released later may exert upward pressure on Bund yields, but expect -0.025% to remain a strong resistance for the 10y.

¨   AxJ Markets: Malaysian foreign reserves edged higher to USD97.5bn (+USD0.2bn m-o-m), which is sufficient to finance 8.1 months of retained imports or 1.2x short-term external debt. MGS declined yesterday, dampened by the weak Brent oil prices where we reiterate our neutral stance on MGS despite its attractive valuations vis-à-vis peers, as the high foreign ownership on MGS (July: 51.9%) is likely to continue keeping MGS and MYR susceptible to external gyrations. Turning to Hong Kong, July’s CPI eased to 2.3% (June: 2.4%), aided by smaller increases in private housing rentals. With CPI likely to remain subdued over the near term, speculations on removal of HKD peg is likely to be diminished, boosting resilience of HKGBs amid risk off sentiment. Elsewhere, the protracted appreciated on the THB continue to seize the attention of Thai authorities given export and economic recovery concerns; position for a 25bps BoT rate cut in 4Q16 which would continue to favour short to mid dated ThaiGBs.

¨   Marginal changes were seen on EURUSD ahead of EU PMI prints later today. With the robust EU PMI prints contrastong UK’s deteriorating PMI, expect some upward momentum for the EURUSD pair towards the 1.14 resistance, which could offer opportunities for investors to add on short EUR positions amid incremental hawkish inclinations from Fed’s Fischer and Dudley gearing towards a possible rate hike by YE16.