28 October 2016
Rates & FX Market Update
Sustained
Momentum on USD Rally to Lie on 3Q GDP Data Due Today
Highlights
¨ Global
Markets: Improving US initial jobless claims and stronger pending home
sales underpinned expectations towards a probable FFR hike in December,
supporting another strong climb on UST yields yesterday; yields on 10y UST rose
to 1.85%, a level last seen in May 2016. Ahead of US 3Q GDP data due today, we
continue to see strong positioning biased to a solid GDP print, where we see opportunities
for investors to add exposure on 10y USTs at 1.90%, keeping a mild overweight
duration stance given skepticism for FOMC to raise FFR meaningfully beyond the
25bps hike expected for December. Elsewhere, UK GDP expanded by 2.3% y-o-y
(2Q: 2.1%), but failed to lift optimism on the GBP as investors remained
wary of the potential downward economic pressure post Article 50 trigger.
Yields on GILTs rose 2-10bps overnight amid increasing criticism for BoE’s QE,
which could undermine savers in the economy; maintain mild overweight
duration bias on GILTs, with expectations for another 10-15bps BoE rate cut
over the coming months.
¨ AxJ
Markets: Underperformance in AxJ currencies were led by KRW, where USDKRW
climbed 0.75% to 1142.5, partially attributed to the ongoing scandal
surrounding President Park, with ratings for the President falling to its
all-time low, exacerbating political woes stemming from a stalemate government.
Meanwhile, China has concluded its 6th Plenary session, where
President Xi Jinping has been conferred the title of a “core” leader, making
small steps to consolidate his position ahead of a key party congress held next
year. Separately, USDCNY inched higher to 6.7835, where we reiterate our
medium term cautious stance on CNY given the close proximity of the currency
pair to the key 6.80 resistance.
¨ USDJPY broke the 105 psychological
resistance decisively yesterday, rising to its 3-month high of 105.26 (+0.74%),
buoyed by the stronger than expected US economic data which supported the
appreciating USD. Momentum on the USDJPY climb is likely to rest upon US 3Q
GDP and protracted extent of Japanese funds turning to offshore markets in
search for yields; weak US GDP to drive the pair back to the 103.90 support.
Stay Long USD – Trend is Your Friend. USD strength returned amid steepening in UST curve
(2s10s at +97bps, widest since May 2016). 10Y UST yield is now at 4-month high
of 1.86%. Elsewhere, Trump regained some momentum with Clinton-Trump spread
narrowing to 5.5 from 7.4 (RealClearPolitics). Looking on, better than expected
US core PCE, 3Q GDP and US payrolls could provide the catalysts for further USD
upside. In the lead-up to FoMC meeting and US payrolls (next week) and US
Presidential Elections (outcome uncertainty) week after next, we reiterate our
bias for USD strength against most currencies including Asian currencies. We
expect USD strength to be more pronounced against the lower yielders, central
banks where monetary policy remains on easing bias and countries that are still
facing sluggish growth + subdued inflation). We still look for a potential move
higher for USD index towards sub-100-levels. Amongst Asians, we expect JPY,
SGD, KRW to remain weak. We see risk of USDSGD, USDJPY, USDKRW pushing towards
1.41, 107, 1155 levels, respectively. USDMYR resistance likely to be capped at
4.25 levels as oil price stability provides buffer against declines. Our
in-house model shows S$NEER at about 1.1% below the implied mid-point of 1.38
levels, with the upper bound at 1.3520 and lower bound at 1.4080. 
