ECB Expected to Maintain Status Quo Over the Near Term; BNM, BI to Hold Policy Rates Amid an Uncertain Backdrop

16 January 2017

Rates & FX Market Weekly

ECB Expected to Maintain Status Quo Over the Near Term; BNM, BI to Hold Policy Rates Amid an Uncertain Backdrop

Highlights

Global Markets

¨   President-elect Donald Trump will step into the Oval Office On Friday 20th of January. While he didn’t provide any insights on his fiscal and spending policies during his first conference last week, market participants will continue to await further details on hopes it will boost growth and inflation with the potential to temporarily revive the Trumpflation trade. We remain cautious on the USD underscoring our neutral stance while persisting uncertainties could continue to anchor the 10y UST yield around 2.30%. In the UK, expect an extremely data-heavy week including CPI, retail sales and labour data, where softer-than-expected prints amid the current “hard Brexit” chatters may send the GBPUSD pair to test the 1.20 psychological support level. Investors will also be watching PM May’s speech on Tuesday closely for further clarity towards the government’s exit plan; remain mildly bearish GBP.

¨   In Europe, after having extended its QE until December 2017, the ECB is expected to remain on hold next week and in the coming months. The bloc struggles with growing anti-EU sentiment, high unemployment rate and tepid economic recovery. Against the backdrop of rising inflation, the ECB remains constrained by savings under pressure with low rates, while rising rates would increase worries on southern European debt. We continue to prefer core bonds over peripheral while holding a mildly bearish Euro stance.

¨   While IP, Machine Orders and PPI data are due this week, the USDJPY is likely to remain driven by USD gyrations; lately the pair found support as expected in the 114 area and could rebound should the reflation trade gain momentum again; remain neutral JPY. Over in Australia, investors are likely to gauge the strength of the labour market, an area of concern for the RBA given the mixed signals recently. AUD is also likely to take cues from key Chinese data due, after strong momentum in the iron ore markets bolstered the currency’s performance since its December lows, where Chinese demand remains significant; stay neutral AUD.

AxJ Markets

¨   Improving export demand within the region is likely to be reflected in Singapore’s NODX, while the retail sales and CPI print are likely to have a marginal impact on SGS and SGD in the week ahead. Instead, we expect the US President Inauguration to be the main driver of risk sentiment: further retracements on USD could spur the USDSGD to test its major support level at 1.4140/4100, with yields on SGS likely to track UST movements closely. Meanwhile, China is scheduled to release the 4Q GDP, IP and retail sales print, where the firm data prints are likely to reinforce PBoC’s prudent monetary stance, but offer little reprieve for CNY over the medium term, underpinning our mildly bearish view on CNY.

¨   Elsewhere in South Korea, expect volatility on the USDKRW pair to persist despite the quiet economic calendar, where we see opportunities for investors to add tactical long positions on USDKRW amid bouts of USD weakness. Further BoK easing remains on the cards, which could continue to favour short dated KTBs over the medium term. Turning to Thailand, we expect THB and ThaiGBs to be driven by the broad risk sentiment, with volatility on USDTHB likely to be mitigated by its low foreign ownership and credible BoT management; maintain neutral view on THB while remaining cautious on extending duration on ThaiGBs.

¨   In Malaysia, inflation data due in the week ahead is expected to remain relatively stable from November’s print, while external gyrations and threats of further capital outflows are likely to push BNM to stand pat when the MPC reconvenes on 19 January. While Malaysia’s core fundamentals remain intact, lingering uncertainties and strong consensus towards higher US rates are likely to impact sentiment towards the country’s assets over the near term, especially for foreign investors that hold a substantial portion of MGS; stay neutral MGS. Bank Indonesia also reconvenes in the week ahead, where we expect the bank to hold its policy rate as well, although retaining their overall dovish tilt. We continue to pen in another 25bps rate cut over the coming months to support economic growth and investment spending, likely contingent on greater stabilisation in financial conditions; remain mild overweight IndoGBs. Over in India, WPI due in the week ahead is expected to tick higher from November’s print, although overall level should remain soft, attributed to the surprise demonetisation effort. We remain neutral towards the INR, with the low volatility and India’s relatively domestic-oriented economy to continue supporting carry plays against selected currencies, such as the EUR.

  

Weekly Positioning

	Rates	FX
Overweight
Mild Overweight	Core EGB, GolSec
Neutral	UST, GILT, ACGB, SGS, HKGB, CGB, MGS, IndoGB	USD, AUD, JPY, HKD, MYR, THB, IDR, INR
Mild Underweight	Peripheral EGB, KTB, ThaiGB	GBP, EUR, SGD, KRW, CNY
Underweight	JGB