Strong US Services PMI Remained Affirmative of FFR Hike in December

27 October 2016

Rates & FX Market Update

Strong US Services PMI Remained Affirmative of FFR Hike in December

Highlights

¨   Global Markets: Strong US services PMI drove yields on USTs higher by 2-4bps overnight, as the sanguine outook affirmed broad investors’ expectations towards a 25bps FFR hike in December; we continue to favour a mild overweight duration on USTs, as FFR hike trajectory over the medium to longer term is likely to remain shallow, underscoring relative attractiveness of USTs vis-à-vis global peers. Unlike the lackluster 2y UST auction, demand for 5y UST new issue was healthy, garnering a BTC of 2.49x (Sep: 2.39x) underpinned by the higher cutoff yields (Oct: 1.303%; Sep: 1.129%). Elsewhere, the USDJPY pair consolidated below the 105 handle, with the recent rally on the pair driven by USD. With an absence of catalysts ahead of BoJ’s meeting on 1 November, we turn towards developments on the US front for directional cues on the pair, while remaining cognizant of the expiring options intermittently this quarter near the 105 resistance, which could trigger a sharp movements; remain neutral on JPY.

¨   AxJ Markets: Singapore’s IP accelerated by 6.7% y-o-y (Aug: 0.5%), where concerns on the sustainability of strong growth lingered on the back of anemic external demand and subdued oil prices. USDSGD remained sticky at 1.39, where we expect modest underperformance on SGD vs AxJ peers over the near term.  Meanwhile, Thailand’s customs exports expanded by 3.4% y-o-y (Aug: 6.5%), bolstering another month of strong trade surplus of USD2.5bn (Aug: USD2.1bn). Additionally, Thailand and CLMV region remained receptive towards the proposal of utilizing local currencies for trading along the borders which could reduce cost and boost trade value over the medium term; demand for comparatively high value exports demand by CLMV bloc is likely to remain supportive to Thai’s trade, supporting a resilient THB over the medium term.

¨   GBPUSD edged higher yesterday to 1.2238 (+0.43%) ahead of 3Q GDP data due later today, where investors remained sceptical of a Brexit induced slowdown given strong economic data released over the past months. We however, reiterate our mildly bearish stance over the medium term, as GBP remains susceptible to negative headlines stemming from the Parliament’s debate ahead of officially triggering Article 50.