Strong US Economic Data Fuelled Climb in USD and UST Yields; BNM Held Rates; BoK to Reduce MPC Meeting Frequency from 12 to 8

24 November 2016

Rates & FX Market Update

Strong US Economic Data Fuelled Climb in USD and UST Yields; BNM Held Rates; BoK to Reduce MPC Meeting Frequency from 12 to 8

Highlights

¨   Global Markets: US economic data outperformed, with durable goods orders, Manufacturing PMI and University of Michigan sentiment bolstering the USD rally alongside higher UST yields, with 10y edging higher to its 16-month high of 2.35%. Remain cautious on USD, with thin liquidity in the FX markets amid Thanksgiving holiday and a shortened Friday trading session likely to exacerbate volatility. Over in UK, Chancellor Hammond signaled the low likelihood for UK to achieve its fiscal consolidation amid Brexit growth woes, with growth forecast revised down to 1.4% and 1.7% in 2017 and 2018 (previous: 2.2%; 2.1%). GILT curve steepened, spurred by higher debt borrowings and inflation expectations amid weak GBP; maintain neutral stance on GILT.

¨   AxJ Markets: In Malaysia, BNM held the policy rate at 3.00% amid threats of foreign capital outflows and further MYR depreciation pressures. Yields on MGS declined moderately yesterday, where we opine for BNM to remain keen to reduce rates by 25bps in 1H17, bolstering growth within the domestic market to fuel the allure for MGS over the medium term. Elsewhere, Singapore’s 3Q final GDP print surprised, with the economy expanding by 1.1% y-o-y (advanced estimate: 0.6%; 2Q: 2.0%), prompting MTI to revise 2016 GDP forecast to 1.0-1.5% (previous: 1.0-2.0%). While MTI kept the 2017 GDP forecast of 1.0-3.0%, increasing downside risks from Brexit and China debt woes continue to fuel greater economic uncertainties, weighing on SGD; maintain a mildly bearish stance on SGD, with further MAS easing likely to be a remote but non-negligible risk. Meanwhile, BoK will reduce the frequency of its MPC meeting from 12 to 8 next year, citing the need for more time to consider the impact of its policies; USDKRW remained elevated at 1,176 yesterday, with increasing pressure from the Parliament to impeach President Park.

¨   The USD rally continues to pressure Asian FX crosses, with the offshore CNH depreciating beyond the 6.95/USD handle, and is edging towards 7.00/USD, a level last seen for the onshore CNY in April 2008. The persistent appreciation on USD over the near term is likely to keep Asian FX hostage, where USDCNY is likely to grind higher in an orderly manner, underscored by PBoC’s priority to manage FX volatility.