Demand for 2y UST New Issue Dampened by Diminishing Expectations of a Gradual FFR Hike Trajectory

22 November 2016

Rates & FX Market Update

Demand for 2y UST New Issue Dampened by Diminishing Expectations of a Gradual FFR Hike Trajectory

Highlights

¨   Global Markets: Cutoff yields at the 2y UST new issuance surged to the highest since 2009 at 1.085% (Oct: 0.855%), but failed to buoy a strong demand as investors continue to position for a December FFR hike; FFR futures indicates 100% probability of FOMC raising rates by 25bps in December. The 2y auction garnered a BTC of 2.73x (Oct: 2.53x), with indirect bidders accounting for 35.8%, significantly lower than its YTD average of 44.3%, dampened by diminishing expectations of a gradual FFR hike trajectory. The broad USD eased overnight with DXY declining by 0.33% to 100.88, where we expect the perceived FOMC hawkish stance to continue to sustain USD’s momentum over the near term.

¨   AxJ Markets: Thai’s economic growth continued to stabilize, with GDP expanding by 3.2% y-o-y in 3Q (2Q: 3.5%), weighed moderately by a deceleration in domestic demand. The weak near term outlook for private consumption alongside downside risk from external demand continue to build the case for another 25bps BoT rate cut, keeping yields on short dated ThaiGBs anchored. We maintain mild underweight duration stance on ThaiGBs, with persistent capital outflows from the Thai bond market likely to remain supportive of a steeper curve. Meanwhile, USDKRW continued its ascend yesterday, climbing by 0.31% to 1186.7 as the likelihood of President Park’s impeachment intensified, which could lead the pocess of a new Presidential election in a shortened timeframe; expect KRW to remain pressured amid political woes. Elsewhere, USDMYR consolidated near the 4.42 handle yesterday amid easing upward momentum on USD. Investors are likely to eye the foreign reserves print due later today, where a strong print may help bolster resilience on the currency; maintain neutral stance on MYR over the near term.

¨   The 7.4 magnitude earthquake in Japan this morning prompted a tsunami advisory for Japan’s Fukushima and Miyagi Prefectures, boosting small gains on the safe haven JPY to 110.42. The halted cooling system for the storage pool at the Fukushima Daini Plant remains closely watched, which could underscore further weakness on the USDJPY pair amid thin liquidity ahead of US Thanksgiving holidays; maintain neutral stance on JPY.