September Rate Hike on the Radar

29 August 2016

Rates & FX Market Weekly

September Rate Hike on the Radar

Highlights

¨   Global Markets: Post Yellen’s speech, the NFP print for August will be closely scrutinized to warrant or not the case that economy is on a consistent pace of recovery hence validate a rate hike as soon as September 21^st meeting; remain neutral USD watching the resistance at 96 for DXY and mild overweight UST with 10y yield below 1.64%. In Europe, the focus will be on the busy economic data calendar for both core and peripheral countries, while Spanish lawmakers vote on Wednesday on backing PM’s Rajoy for a second term ending an eight-month political stalemate. In the UK, confidence indicators are expected to improve over July numbers, although any disappointment is likely to drive modest retracements in recent GBP gains; stay mildly bearish GBP as uncertainties over an eventual UK exit lingers on. Turning to Japan, investors’ attention is likely to remain on the USDJPY which is still testing the 100 psychological level amid disappointing economic data, exerting pressure onto BoJ with mounting expectations of additional monetary stimulus; remain neutral JPY. Elsewhere, the heavy economic calendar in Australia is likely to drive movements in the week ahead, with 2Q16 capex particularly interesting to watch for insights into the ongoing economic rebalancing; stay neutral AUD.

¨   AxJ Markets: Soft Chinese manufacturing PMI prints are likely to remain in the limelight as the economy remains mired in overcapacity, supporting lingering expectations for PBoC to ease in 4Q16; reiterate our 6.70/USD average CNY forecast for 4Q16. In Hong Kong, HKGB yields are expected to take cues from USTs, given stable expectations towards the USD-HKD peg; remain neutral HKGBs. Over in South Korea, BoK minutes may provide insights into the bank’s near and medium-term priorities on the economy, while a stream of economic data is likely to reinforce the current external and disinflation challenges; position for another 12.5bps rate cut in 2016. Elsewhere, another contraction in manufacturing conditions is likely to bolster the case for MAS to re-center the SGD NEER as the October policy review draws near; stay mildly bearish SGD. In Malaysia, the MYR continues to take cues from oil prices, as markets eagerly awaits the outcome of the OPEC ad-hoc meeting in September amid promises of an impending supply freeze; stay neutral MYR, with beta on the USDMYR pair to remain high. Amid current challenging external conditions, CPI print due is expected to continue undershooting BoT’s target range, bolstering dovish expectations despite policy rates close to its all-time lows in 2009. However, expect the THB to remain stable over the near term given prudent reserves management by BoT. In Indonesia, the easing CPI print continues to pave the way for further BI rate cuts over 2016, while foreign reserves may continue to tick higher amid persistent foreign inflows; stay neutral IDR over the near term. Over in India, the 2Q16 GDP print is expected to print at a relatively robust 7.5%, affirming India’s position as one of the fastest growing EM economy despite credibility concerns towards the data; stay neutral Gsecs.

   

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, GBP
Underweight	JGB