Strong EU Data Failed to Cushion Weakness on the EUR

7 December 2016

Rates & FX Market Update

Strong EU Data Failed to Cushion Weakness on the EUR

Highlights

¨   Global Markets: Marginal movements were seen on the UST curve overnight as strong factory and durable goods orders continued to reaffirm the prospects of a 25bps FFR hike next week. With uncertainties surrounding President-elect Trump’s policies, we opine for a moderate period of pause following the December FFR hike through 1H17 as FOMC deliberates impact on CPI, while labour market continues to approach full employment; maintain a neutral duration stance. Turning to EU, the outperformance on German factory orders alongside a modest improvement on EU 3Q GDP was unable to arrest the decline in EURUSD yesterday, which slipped to 1.0719 (-0.42%) on early Italian election chatters. With our expectations skewed towards a 6-month PSPP extension, we expect EURUSD to remain under pressure over the coming week, retesting the 1.05 support.

¨   AxJ Markets: In South Korea, President Park has agreed to the ruling party’s proposal to step down in April even as the opposition party plans to go ahead with the impeachment vote which is likely to take place at the end of the week. Should a qualified majority (200 out of 300) votes in favour, President Park would be suspended from duties and the constitutional court would be given 180 days to review the move, with a Presidential elections expected to take place within 60days. USDKRW edged lower to 1171 (-0.30%) while yields on KTBs climbed 1-2bps yesterday amid the strong risk appetite, with the prospects of easing political tensions likely to drive focus back to mitigate the weakening economic momentum. Meanwhile, following the glitch on USDCNY quote yesterday, investors eagerly await the Chinese foreign reserves print due today, where a steeper than expected decline may prompt further risk aversion, driving the USDCNY pair to test the 7.00 resistance amid strengthening USD.

¨   While RBA opted to hold rates at 1.5% yesterday, downplaying the slowing growth momentum, the 3Q GDP contraction on a q-o-q basis challenged RBA’s Lowe neutral stance, driving AUDUSD lower to the 0.74 handle. While the overheating property markets are likely to fuel RBA’s prudence, we see modest likelihood for another 25bps rate cut as early as 1H17 to mitigate emerging downside risks over the medium term.