Multiple Hurdles for EU in the Weeks Ahead, with Italian Referendum, ECB Meeting and French Referendum Weighing on EUR

25 November 2016

Rates & FX Market Update

Multiple Hurdles for EU in the Weeks Ahead, with Italian Referendum, ECB Meeting and French Referendum Weighing on EUR

Highlights

¨   Global Markets: Firm 3Q GDP expansions from Germany and Spain continued to keep EURUSD marginally above the 1.05 support yesterday alongside a modestly wider core-peripheral EGB spreads. With the recent spate of rising yields in the EU easing pressure on ECB to tweak the bond purchase parameters, focus is likely to remain fixated on the likelihood for ECB to extend the PSPP by 6 months in its upcoming ECB meeting on 8^th December. ECB’s decision to extend the PSPP could signal its continued dovish central bank inclination, supporting further downward momentum on EURUSD below the 1.05 handle, compounded by impact from the Italian Referendum and French Elections thereafter; align EUR to a mildly bearish stance.

¨   AxJ Markets: While South Korean household credit continued to surge to KRW1296trn (+11.2% y-o-y), exceeding the pace of nominal GDP growth by a large margin, we continue to see the likelihood for another BoK rate cut elevated over the coming months amid rising political woes dampening prospects of another supplementary budget. Spread between the 3y KTB and 2y UST rose to 70bps yesterday, where the prospect for narrowing policy rate differential would suggest for narrowing spreads over the medium term; seek opportunities to enter a hedged 3y KTB vs 2y UST. Over in India, USDINR surged to its all-time high of 68.748 (+0.27%) yesterday, spurred by continued capital outflows from the financial markets. With offshore accounts continuing to pull out of Asian EM markets amid increased uncertainty from US policies, we expect Asian EM FX to remain pressured over the coming weeks, warranting a continued cautious stance, particularly for countries with high foreign ownership and twin deficits.

¨   With an opposition-led President Park’s impeachment vote scheduled for December, populist movements continue to gain traction in South Korea, fuelled by discontentment with the current establishment. Keep a mildly bearish stance on KRW over the medium term, which is likely to be weighed by South Korean political woes alongside the rise of populist Presidential candidates leaning to Trump campaign style.