Friday, October 21, 2016

EURUSD and EGB Yields Fell Despite Little Dovish Signals from ECB; BI Surprised with 25bps Rate Cut

21 October 2016


Rates & FX Market Update


EURUSD and EGB Yields Fell Despite Little Dovish Signals from ECB; BI Surprised with 25bps Rate Cut

Highlights

¨   Global Markets: Despite providing minimal dovish signals through the post ECB meeting press conference, the decline in EURUSD to 1.0927 (-0.43%) and flattening EGB curves suggested reinforced market expectations of both ECB’s dovish stance alongside diverging FOMC-ECB monetary policies over the coming months. While EGBs remain vulnerable to selloffs, we continue to see opportunities to add on dips, with a preference skewed towards the core EGBs. Meanwhile, strong existing home sales data compounded on the stronger risk on environment post Fed Beige book, boosting strength on USD overnight, with yields on UST rising alongside. We expect the USD to remain particularly sensitive to US economic data over the coming weeks, with a strong 3Q GDP print likely to cement the case for FFR hike in December; maintain mild overweight USTs, where a limited extent of FOMC monetary tightening over the medium term could keep UST yields near its current range.
¨   AxJ Markets: Turning to Indonesia, BI surprised by reducing rates by another 25bps yesterday to 4.75%, bringing the cumulative policy rate cuts this year to 150bps. With inflation remaining at the lower end of BI’s forecast range and economic growth facing emerging downside risks, the case for further BI rate cut lingers and may potentially weighs on IDR’s strength, particularly at a time where FOMC contemplates tightening monetary policies; maintain neutral stance on IDR. Elsewhere, Malaysia is expected to release its FY17 budget later in the day, where we opine for the government to keep true to its steady fiscal consolidation plans despite the possibility for early elections called next year; keep a mildly bullish stance on MYR, with the currency poised to be supported by stabilising oil prices and carry flows.
¨   AUD emerged as the worst performing currency yesterday, depreciating by 1.26% to 0.7624/USD, weighed by the dismal labour data released yesterday. While unemployment rate fell to 5.6%, it masks the deteriorating conditions with the declining participation rate and employment change, driving the case for a prolonged accommodative RBA stance at the very least; keep a cautious stance on AUD.

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