AxJ Foreign Reserves Offer A Hint of November’s Sell-off

5 December 2016

Rates & FX Market Weekly

AxJ Foreign Reserves Offer A Hint of November’s Sell-off

Highlights

¨   Global Markets: In the US, while several key cabinet positions remain to be filled, market participants will eye who might fill Treasury positions under controversial Mnuchin; remain cautious towards UST over the remainder of 2016. On the economic front, Services PMI are anticipated to have improved in November, which will remain supportive to the USD over 4Q16. In the UK, service PMI and IP due is likely to indicate continued modest expansion. The GBP has been resilient amid repositionings, although a great deal of unknown continues to cloud UK’s exit strategy; stay mildly bearish GBP. In the EU, focus will likely be on Italy after PM Renzi resigned post-referendum, alongside possible contagion effects on Italian banks. ECB also reconvenes in the week ahead, where we expect an extension of the PSPP by 6 months; stay mildly bearish EUR. Over in Japan, 3Q16 GDP may be revised higher to reflect a slight improvement to 0.6%. October Current account is also due for release and expected to have narrowed while JPY was stronger; expect the USDJPY to be driven by dollar in December, and stay neutral JPY. Elsewhere, we see a low likelihood for RBA to cut the cash rate in the week ahead, with the recent softening of the AUD offering some near-term relief. 3Q16 GDP due after the meeting is expected to soften from the 2Q print, while the private monthly inflation due may also draw some interest; stay neutral AUD.

¨   AxJ Markets: Investors await China’s November foreign reserves data amid CNY’s outperformance vs regional currencies where a steeper than expected decline may prompt further regulations by Chinese authorities; USDCNY likely to test the 7.0 resistance. China trade and CPI data is unlikely to reinforce PBoC’s prudent stance, undermining strength on CGBs; maintain neutral CGBs. Over in South Korea, an opposition led impeachment vote is likely to be held in the week ahead, where a status quo decision may continue to exert pressure on BoK for further easing measures, keeping KRW trading on a soft note; maintain constructive view on short to belly KTBs. Elsewhere, Singapore and Hong Kong are expected to release the Nikkei PMIs and foreign reserves, where the sluggish PMI prints could underscore both city state inclination towards larger fiscal budgets. Meanwhile, a quiet economic calendar in Thailand, where movements on ThaiGBs are likely to take directional cues from global markets; continue to position for another 25bps BoT rate cut over the coming months. In Malaysia, expect a relatively heavy calendar with trade data, foreign reserves and IP due. We suspect greater scrutiny will be on the foreign reserves print, and expect the MYR to remain under pressure despite the reprieve in oil prices; stay neutral MYR. Elsewhere, Indonesia’s foreign reserves print due may offer insights into BI’s involvement in managing IDR. The country remains vulnerable to rapid shifts in sentiment, although cushioned by BI’s flexibility towards the rupiah and its re- accumulation of foreign reserves; stay neutral IDR. In India, RBI reconvenes under extraordinary circumstances following the demonetisation. Amid downside risks to growth and inflation over the coming quarters as the cash shortage persists, we think RBI can deliver another 25bps rate cut given the dovish policy stance; stay mild overweight Gsecs.

   

Weekly Positioning

	Rates	FX
Overweight
Mild Overweight	C.EGB, MGS, IndoGB, GolSec	MYR
Neutral	UST, SGS, HKGB, CGB, Gilts, ACGB	USD, AUD, JPY, HKD, THB, IDR, INR, EUR
Mild Underweight	P.EGB, KTB, ThaiGB	SGD, KRW, CNY, GBP
Underweight	JGB