Falling Oil Prices Weigh on Risk Sentiment; Poor UK PMI to Pressure BoE Into Further Easing on Thursday

2 August 2016

Rates & FX Market Update

Falling Oil Prices Weigh on Risk Sentiment; Poor UK PMI to Pressure BoE Into Further Easing on Thursday

Highlights

¨   Global Markets: Despite tumbling oil prices overnight with WTI briefly fell below USD40/bbl, the upward momentum on USTs was interrupted by modestly strong manufacturing PMI which indicated continued expansion, while ISM print remained firmly in expansionary territory (Jul: 52.6; Jun: 53.2). With FFR trajectory likely to remain gradual amid global uncertainties, we stay mild overweight USTs; eye NFP which remains a strong catalyst driving FFR expectations over the coming months. GBP suffered another negative shock overnight (-0.42%) as UK’s July final manufacturing PMI printed below the already-gloomy flash print (48.2; flash: 49.1), as Brexit-related uncertainties weighed on sentiment; stay bearish GBP over the near-term. Over in EU, manufacturing PMI stayed in expansionary territory on healthy German activity, while Spain and Italy underperformed; overweight core EGBs relative to peripherals. In Japan, the weak manufacturing PMI have limited impact on Japanese assets, as JGB yields widened 2-6bps overnight following last week’s disappointing BoJ decision; stay underweight JGBs on poor risk-reward.

¨   AxJ Markets: Chinese manufacturing PMI were mixed, with the official gauge dipping marginally below 50 while the private gauge surged to 50.6 (Jun: 48.6). Investors remain cautious on the softer Chinese growth trajectory, with the offshore CNH declining 0.27% against the USD overnight to 6.646; stay mildly bearish on the Chinese currency. Over in Thailand, both CPI and core CPI slided, paving the way for BoT to cut 25bps in 4Q16; stay neutral THB, as the currency is likely to remain resilient even amid the current easing cycle. Indonesian CPI softened in July to 3.21% y-o-y (Jun: 3.45%), incentivising BI to deliver further policy accommodation to drive growth and stabilise the currency, amid an influx of capital inflows arising from the tax amnesty program; stay neutral IDR.

¨   AUDUSD fell 0.86% overnight ahead of the RBA rate decision later today, where consensus expects another 25bps rate cut in governor Steven’s final policy meeting. A private inflation measure revealed that July prices declined to 1.0% y-o-y (Jun: 1.5%), compounding on last week’s tepid CPI print, which is likely to keep RBA’s prolonged accommodative stance, limiting AUD’s ascend amid increased appetite for risk assets.