30 September 2016
Rates & FX Market Update
European Banking Woes Fueled Risk
Aversion, Weighing on EGBs
Highlights
¨ Global
Markets: The array of Fedspeak had a fairly limited impact on USTs as
investors appeared to have looked beyond the next FFR hike, with expections
for monetary tightening trajectory to remain shallow. Stronger than expected US
data failed to offset the rising risk aversion within global markets,
with yields on USTs declining 1-2bps overnight; 2y and 10y USTs remained
range bounded within 0.70-0.85% and 1.50-1.75% respectively since July.
Over in EU, debates over Deutsche Bank woes and its potential USD14bn fine
fueled risk aversion in the region given the potential spillovers throughout
the weak banking system. Yields on 10y EGBs climbed 2-4bps overnight, where
we maintain our recommendation for investors to favour core EGBs over its
peripheral counterparts. Elsewhere, the lackluster CPI from Japan (Aug:
-0.5%; Jul: -0.5%) reinforced the obstacles faced by BoJ policy makers amid
increasing uncertainties within the global market; USDJPY climbed higher to
101.09 (+0.36%) yesterday, with hawkish Fedspeak and risk aversion over the
coming week likely to continue easing downward pressure on USD.
¨ AxJ
Markets: Deeper contractions in South Korea’s manufacturing PMI offset
optimism stemming from the strengthening IP data released this morning,
limiting further upward climb in KTB yields over the near term. With KRW assets
remaining highly susceptible to FOMC FFR decisions alongside limitations
towards BoK’s inclination to reduce policy rates aggressively, we recommend
for investors to maintain the mild underweight duration view, with expectations
for BoK to reduce only by 12.5bps in 4Q, capped by concerns over household
indebtedness. Narrowing Fed-BoK policy rate differentials is also likely to
hold a large bearing on KRW, where we expect the pair to climb modestly
higher to 1150 by 2Q17, edging alongside the USDCNY pair.
¨ Oil prices sustained strong gains
post OPEC agreement, but failed to bolster gains on commodity currencies, with
AUDUSD falling to 0.763 overnight (-0.73%). The short-lived
gains were attributed to weaker risk appetite stemming from Deutsche Bank woes
and its potential spillover to European Banking system. Keep a neutral AUD
view, with the OPEC November meeting to play a crucial role in influencing
commodity currencies.
