Investors Continue to Eye a December Rate Hike Amid President-elect Trump Reflationary Policies

15 November 2016

Rates & FX Market Update

Investors Continue to Eye a December Rate Hike Amid President-elect Trump Reflationary Policies

Highlights

¨   Global Markets: President-elect Trump’s perceived reflationary policies continued to drive US rates higher, while DXY index broke past the 100 psychological level as well. While Fed’s Lacker hinted that FFR may rise more rapidly with more fiscal stimulus, Fed’s Kaplan calls it “premature” to gauge the impact of a Trump presidency; markets remained convinced towards a December rate hike, with FFR futures indicating a c.92% probability. Announcements from Trump’s transition team suggest policy uncertainties could persist, while 10y USTs are likely to settle within a new range of 2.0-2.5%, with risks broadly balanced; we turn neutral on USTs. In Japan, 3Q GDP surprised on the upside (2.2% q-o-q SAAR; consensus: 0.8%), mostly attributed to trade gains, with consumption contributing only 0.1ppt. Aided by impact from a weaker JPY, this could ease pressure on BoJ to deliver further policy accommodation with the Bank likely to take stand pat in the 6 months following its recent framework adjustment to gauge its policy impact; stay neutral JPY. RBA minutes due this morning indicated that underlying conditions appear to be stabilising, including the Chinese economy and commodity prices, although risks remain towards assessing the housing and labour markets. Recent easing of upward AUD pressure may also be beneficial at the margin; we maintain our neutral AUD stance.

¨   AxJ Markets: October Chinese data due were mixed, with IP and retail sales slightly weaker than expectations, while FAI came in marginally stronger than consensus. The data remained supportive of stabilising growth above the 6.5% target, though the USDCNY upward pressure persists due to strong dollar appreciation. We remain of the view for PBoC to guide CNY movements in an orderly fashion against a basket of currencies, with any depreciation likely to be gradual; stay mildly bearish CNY.

¨   EURUSD declined 0.9% overnight, and has lost c.2.1% since Mr Trump won the US presidency. Investors are likely to shift their focus towards the Italian referendum, where current opinion polls are leaning towards a “no” decision, though a huge proportion of voters remain undecided which could still swing the outcome in either direction. We remain neutral on the EUR on the bloc’s external surplus and shoots of economic data upticks.