19 October 2017
Rates & FX Market Update
FFR Futures Remain Highly Supportive of a December Rate Hike
¨ Global Markets: US Treasuries continued to fall, touching an intraday high at 2.35% after comments by FOMC's Dudley and Kaplan supported the view of extra tightening by year end; FFR implied probability for December is steady at c.80%. The broad USD was however lower following the releases of dismal economic data and as the Fed's latest Beige Book reported that a tight labour market is now adding challenges to find "qualified workers" and is not translating into higher wages; remain neutral USD as moreover uncertainties over fiscal agenda and tax reforms linger. The EURUSD pared earlier losses, bouncing in the area of our defined support at 1.1750. Markets still consider that the anticipated ECB's QE extension could provide an upside rate surprise and translates the improving environment in Europe, supporting the Euro. On the political front, Madrid's ultimatum to Catalonia expires at 10am local time (4pm SG/KL time) and the region could lose its autonomy should its President fail to renounce his independence claims. The political jitters could continue in the coming days as taking control over the region by the central government is not automatic and requires Senate approval; however effects on markets are likely to vanish on receding chances of the realisation of independence; remain mildly bullish EUR.
¨ AxJ Markets: Elsewhere in China, movements in USDCNY and USDCNH were broadly subdued as the twice-a-decade congress gets underway. President Xi vowed to deepen supply-side reforms and continue on its deleveraging path, seeking a higher quality of growth going forward. With Xi likely to cement his power post-transition, investors will be looking closely at the next generation of potential leaders for China's willingness to continue on its reform path over the medium to long-term. On a shorter-term horizon, relatively robust growth and easing capital outflow pressures should drive a stable Yuan over the coming months; a neutral CNY stance remains appropriate.
¨ AUDUSD was relatively unchanged overnight, with the pair subsequently edging higher this morning, driven by better-than-consensus employment print (19.8k; consensus: 15k) and an unexpected dip in unemployment rate to 5.5% (consensus: 5.6%). Expect AUD to take cues from key Chinese data due later this morning, with robust Chinese prints likely to support the commodity complex alongside Australia's terms of trade, although we do not see any RBA tightening for the remainder of 2017, which should keep the AUDUSD under the 0.80 level on average; stay neutral AUD.
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