Modi’s Surprise Demonetization Move Weighed on India’s Service-Oriented Economy

6 December 2016

Rates & FX Market Update

Modi’s Surprise Demonetization Move Weighed on India’s Service-Oriented Economy

Highlights

¨   Global Markets: The ISM non-manufacturing data remained reassuring towards a 25bps FFR hike in December, supporting a modestly bear flattening UST curve. Yields on 2y UST edged higher to 1.12% ahead of the FOMC meeting next week, bolstered by Fedspeak yesterday where Fed’s Dudley, Evans and Bullard continued to signal inclination for FFR hike; maintain neutral duration stance on USTs. Over in UK, services PMI print climbed to its 10-month high of 55.2, signaling broad optimism towards a resilient near term economic growth momentum. GBPUSD inched higher to 1.2730 (+0.36%) yesterday, where dim prospects of further BoE easing remained modestly supportive of the currency ahead of formal Brexit negotiations; keep a mildly bearish view on GBP over the medium term. Meanwhile, with the exception of France, services PMI released out of EU overwhelmed expectations, partially easing pessimism within the bloc following Italian referendum. Upward climb on peripheral EGBs yields were moderate, underscored by ECB’s PSPP program where an extension is likely to remain supportive of the peripheral bloc.

¨   AxJ Markets: Movements on USDCNY remained marginal yesterday despite an upward climb on Caixin services PMI, which complemented the manufacturing PMI data released earlier last week. USDCNY continued to linger below the 6.90 resistance, where we caution on optimistic view on CNY, with expectations for the pair to test the 7.00 barrier over the coming weeks. India’s services PMI fell sharply into the contraction territory, dampened by Prime Minister’s Modi’s surprise demonetization move. The poor data reflects pessimism as a result of curbed discretionary spending due to India’s services oriented economy, weighing on prospects for the services-oriented economy over the near term; remain constructive on GolSecs.

¨   Following the Italian referendum, EURUSD traded in a volatile fashion where the pair tested but failed to break the 1.05 support and subsequently surging higher by 1.38% to 1.0764 amid short coverings in the FX market. Prime Minister Renzi, has however agreed to President Mattarella’s request to place his resignation on hold until the Senate gives its final approval to the budget; keep a cautious stance on EUR.