Clarity on UK’s Theresa May “Hard Brexit” Vision

18 January 2017

Rates & FX Market Update

Clarity on UK’s Theresa May “Hard Brexit” Vision

Highlights

¨   Global Markets: As bond markets reopened from the festive holidays, yields on USTs slipped 4-8bps despite Fed’s doves Dudley and Brainard reiterating their optimistic outlook, while citing the need for a steeper FFR hike should fiscal policies tighten slack in the economy. Investors’ focus was instead zoomed into President-elect Trump’s emphasis on the strength of USD, which renders it challenging to support Trump’s plan to rebuild the American manufacturing sector. We maintain our cautiously optimistic view on USD as we await further clarity from US fiscal outlook, which remains the largest catalyst on the USD over the near term.

¨   AxJ Markets: Following the softer USD movements overnight, USDMYR edged below the 4.45 support for the first time since mid-December; movements on MGS however remained relatively subdued. We expect the recent volatility on FX markets alongside lingering uncertainty surrounding the US fiscal outlook to cement a status quo BNM decision on tomorrow; keep a neutral duration view on MGS. Meanwhile, India’s Finance Minister Jaitley failed to achieve consensus on GST, deferring its targeted implementation further to 1^st July (previous: 1^st April). Stalemate on the issue is likely to exert further pressure on India’s fiscal balances, dampening sentiment on INR over the medium term.

¨   GBPUSD recorded its largest one day percentage gain since 1993, appreciating by 3.02% to 1.2413 following Prime Minister May’s speech. Although May outlined her plans for a hard Brexit with no interest in partial membership of EU, clarity on UK’s objectives alongside the commitment to send the final deal for voting in the Parliament eased uncertainty and spurred some tactical short coverings on GBP. That said, ramifications from the phased transition remain a concern, underscoring our bearish stance on GBP over the medium term.