Stalemate at OPEC Eased, Oligopoly to Reduce Output by c.750k Barrels

29 September 2016

Rates & FX Market Update

Stalemate at OPEC Eased, Oligopoly to Reduce Output by c.750k Barrels

Highlights

¨   Global Markets: While US’s durable goods orders outperformed consensus expectations, the flat print in August provided little optimism for investors, adding to the string of lackluster data seen over the past month. Moreover, while Fed’s George and Mester defended their views to raise FFR, the cautious stance advocated by Fed’s Yellen, Kashkari, and Evans amid low inflationary pressures undermined strength on the USD, keeping DXY firmly below the 96 handle; maintain mild overweight USTs. Meanwhile GBPUSD held firm above the 1.30 psychological level even as BoE’s Shafik cited the need for further monetary easing over the near term; upward pressure on the EURGBP pair to persist, providing opportunities for investors to add on any weaknesses.

¨   AxJ Markets: The stalemate at OPEC has eased, with the oligopoly concurring to reduce output by c.750k barrels to 32.5m barrels a day, with individual output limits and final output reduction plans determined at the next formal meeting in November. Brent oil prices surged to USD48.69/bbl (+2.72%), supporting a strong recovery on MYR this morning towards the 4.10/USD handle. Turning to Thailand, strength on THB remained a key focus of BoT minutes published yesterday, with officials citing its dampening impact on economic recovery, with downside risks to growth persisting. USDTHB declined marginally to 34.58 yesterday, where we expect 34.50 to remain a key support for the pair, with BoT likely to continue to play an active role in FX market should alternating expectations for FOMC FFR decision spur volatility in the Asian FX markets. While fiscal policies remained the main driver of economic growth in Thailand, we maintain our view for another 25bps BoT rate cut in 4Q16, which could keep conditions within the domestic economy conducive for a stronger recovery; keep a neutral stance on THB.

¨   USDJPY hovered precariously above the 100 support level, as expectations for a modest Fed-BoJ policy rate divergence continued to limit further USD weakness. The deepening divide within the FOMC is likely to be a key catalyst on the pair over the coming weeks, with any increasingly hawkish shift towards the Fed’s Presidents camp likely to dampen further downward pressure; maintain neutral stance on JPY.