27 September 2016
Rates & FX Market Update
ECB’s Draghi Remained Vocal on Advocating for Fiscal Spending and Reforms While Assuring Markets of Further ECB Ammunition
¨ Global Markets: Better than expected new home sales data was overshadowed by the increasingly divisive FOMC, with Fed’s Kaplan and Kashkari (2017 FOMC voters) driving the hawkish and dovish camp respectively, undermining the clarity of policy communication to the market. Meanwhile, demand for 2y UST new issuance was soft, garnering a BTC of 2.65x with cutoff yields at 0.75% (Aug: 2.83x; 0.76%); 2y UST yields declined post auction to 0.73% where we remain biased towards a mild overweight stance. The Presidential debate also garnered interest, with the tightening polls between nominees Clinton and Trump exacerbating uncertainty, weighing on sentiment. Elsewhere, ECB’s Draghi remained adamant against granting UK special favours while advocating for governments to boost fiscal spending and reforms to complement ECB monetary policies; gains on ECBs remained in line with global markets, where we prefer exposure to core EGBs over its peripheral counterparts.
¨ AxJ Markets: Singapore’s IP inched marginally higher by 0.1% y-o-y (Jul: -3.6%) despite a positive surprise from the electronics cluster, weighed by weak demand for offshore machinery, biomedical manufacturing, and exports from regional and global markets. USDSGD remained sticky at 1.36 ahead of the mid-October MAS MPS, where our expectation of a status quo MAS is unlikely to be supportive of a strengthening SGD given its weak growth outlook. Over in Thailand, exports climbed 6.5% y-o-y (Jul: -6.4%), boosted by a surge in automobile exports. Marginal movements were seen on ThaiGB curve yesterday, where the Thai government’s policies towards supporting domestic demand and infrastructure continue to spur higher ThaiGB issuances; maintain mild underweight ThaiGB duration.
¨ Strong gains on JPY spurred concerns, as only an estimated 60% of JPY risk is hedged by Japanese investors, threatening a stronger appreciation should USDJPY breaks 100 decisively with domestic investors increasing their hedge ratios. While catalysts pushing USDJPY beyond 100 are likely to be externally driven, BoJ’s credibility is likely to remain on the line to smooth out volatility; maintain neutral stance on JPY.