RBI Surprised with a Status Quo Decision, Spurring GolSec Yields Higher

8 December 2016

Rates & FX Market Update

RBI Surprised with a Status Quo Decision, Spurring GolSec Yields Higher

Highlights

¨   Global Markets: Disappointing IP in UK weighed on GBP, with the GBPUSD pair edging lower to 1.2626 (-0.41%) as the dismal data compounds on Brexit woes, where Prime Minister Theresa May has agreed to reveal Brexit proposal but sought support to adhere to the proposed timeline of invoking Article 50 by end March 2017. Yields on GILTs declined by 2-6bps, mirroring movements on USTs, where we expect movements on the latter to remain in a tight range ahead of FOMC vote next week; eye UK’s upcoming CPI prints where we see a low likelihood for BoE to commit to further easing, constrained by rising CPI from weak GBP.

¨   AxJ Markets: Over in South Korea, KTB curve bull steepened following authorities’ pledge to undertake market stabilizing measures to mitigate the rising yields, thereby easing the higher interest burden on households and corporates. A Parliament vote is scheduled tomorrow to impeach President Park, where we opine for the lengthy impeachment procedure to continue exerting pressure on BoK for further easing to cushion the increasing downside risks; remain constructive on short dated KTBs. Malaysia’s exports fell sharply by 8.6% y-o-y (Sep: -3.0%) amid deep contractions in commodity shipments and non-E&E products while trade surplus widened to MYR9.76bn (Sep: MYR7.56bn) as imports fell sharply. USDMYR continued to stabilize post BNM measures, where we opine for a neutral view to remain appropriate. Meanwhile, RBI surprised with a status quo decision, spurring the GolSec curve to shift higher by c.25bps. Despite so, we remain of view that the demonetization move has supported easing conditions through strong liquidity within the banking system and modestly declining rates which could have buttressed RBI’s decision yesterday. We expect RBI to resume easing in 1H17, underscoring our mild overweight duration stance over the medium term.

¨   China recorded its largest decline in foreign reserves since January, with reserves declining by USD69.1bn to USD3.05trn, indicating PBoC active management in mitigating CNY’s depreciating amid capital outflows. While further tightening capital controls are likely to persist amid efforts to ease the capital movements, tenacious USD strength is likely to pressure the pair to test the 7.00 resistance over the near term; maintain mildly bearish CNY.