Weak US Data Releases to Constrain FOMC Hawkish Forward Guidance

19 September 2016

Rates & FX Market Weekly

Weak US Data Releases to Constrain FOMC Hawkish Forward Guidance

Highlights

¨   Global Markets: Rate decisions are due in US and Japan on Wednesday.  In the US, despite recent hawkish Fedspeaks the case for FFR hike does not appear compelling in light of the latest soft economic data prints without strong inflationary pressures, even with a tighter labour market. The economic calendar is otherwise rather quiet; the housing sector will take the rest of the spotlight with reports on home sales and residential construction; remain neutral USD and mild overweight UST. In Japan, the recent bear steepening translates expectations of BoJ potential inclination to change the course of its QE and counter the adverse effects of low interest rates on the long-end of the curve. As such, the release of its measures review will be utterly dissected and might pave the way for future policies; remain neutral JPY. In Europe, with a light economic calendar, expect markets to take cues from Central Banks decision; remain mildly bearish EUR. After a heavy calendar in the UK, the week ahead appears relatively light with only PSNB due. UK asset movements are unlikely to remain static amid Fed and BoJ policy decisions, while the results of BoE bond purchases should still draws investors’ attention; stay mild overweight Gilts as BoE rate cuts remain on the cards, with November being the most likely scenario in our view. Over in Australia, while investors are likely to scan the RBA minutes due for future policy hints after a status quo Sep statement, global developments in the week ahead are likely to overshadow the former; stay neutral AUD.

¨   AxJ Markets: Fairly quiet economic calendar in the week ahead, with risk appetite for AxJ assets likely to be predominantly driven by Fed’s forward guidance post FOMC. In China, easing expectations for PBoC to cut rates over the very near term, amid strengthening economic recovery, is unlikely to dull demand for the 2y and 5y CGBs re-openings; 50-100bps RRR cuts however, remain likely in 4Q16. Meanwhile, with 10/20y KTB spreads tightening to its 4-year low, 10/20y KTB steepeners appears attractive; the USDKRW pair is expected to remain sensitive to rapid shifts in sentiment on USD, with a fairly shallow and gradual pace of FFR hike likely to underscore room for another 12.5bps BoK rate cut over 4Q. Elsewhere in Singapore, the stabilizing CPI prints are likely to be marginal on influencing expectations for MAS mid-October MPS, where we expect a status quo decision; expect mildly bearish pressure on SGD however, to persist amid lingering expectations fueled by weak growth momentum. Turning to Thailand, BoT’s accommodative stance over the medium term is likely to continue to anchor short to belly ThaiGBs, supporting strong demand for the upcoming 5y ThaiGB reopening while USDTHB appears to be consolidating between the 34.5-35.0 range. In Malaysia, another soft CPI print is likely to fan expectations for another 25bps rate cut in November amid emerging downside growth risks, although the bank is also likely to consider the broader macro condition prior to any decisions to avoid another substantial MYR sell-off; stay neutral MYR. BI reconvenes on 22 September; while we think there is still a good chance for them to cut rates further by 25bps and/or further macro-prudential measures, the decision is likely to be partially influenced by the FOMC meeting as well; stay neutral IDR. With few key economic data due in India, expect movements in Indian assets to be driven by global developments in the week ahead, while the most recent CPI print is likely to renew dovish expectations among investors; 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