Yellen Reiterated that FOMC is Close to Fulfilling its Twin Mandates

19 January 2017

Rates & FX Market Update

Yellen Reiterated that FOMC is Close to Fulfilling its Twin Mandates

Highlights

¨   Global Markets: Yields on USTs jumped 7-12bps yesterday as Fed’s Yellen commented that the Bank is close to fulfilling its twin mandate, suggesting further monetary tightening to come over the medium term. While little hints were given on the timing of the next FFR hike, details from the Beige Book revealed tighter labour market and wage gains, which could pressure the FOMC to raise the FFR as soon as clarity is shed on US’s fiscal outlook. That said, expect volatility on USTs and USD to persist over the coming weeks given the unpredictability of US President-elect Trump, underscoring our preference to keep a neutral stance on USTs and a mildly bullish view on USD. In spite of stronger wage growth, GBPUSD retraced lower to 1.2262/USD (-1.22%) yesterday as prospects for a wider divergence in US-UK policy rate differential exerted pressure on GBP; softer movements on GILTs remained in line with USTs. While uncertainties on near-term political aspects of Brexit appeared to have eased, the start of UK-EU negotiations could usher in renewed volatility that may continue to weigh on the current fragile sentiment. We expect BoE to remain aligned to a neutral monetary policy stance, underpinning our neutral duration view on GILTs, but prefer to keep a bearish stance on GBP, with bouts of volatility to persist over the medium term.

¨   AxJ Markets: Quiet economic calendar in the AxJ bloc with only Malaysia CPI release yesterday. While CPI remained subdued at 1.8% y-o-y (Nov: 1.8%), the softer movements on MYR could persuade BNM to keep the policy rate unchanged at 3.00%, supporting some near-term resilience on the currency below the 4.50 level. MGS curve bull flattened yesterday, where we remain affirmative on a neutral duration view for MGS given its attractive carry.

¨   Sharp pullback was seen on the AUDUSD pair amid the softer commodity prices and strengthening USD movements overnight, with AUD depreciating to 0.7506/USD (-0.79%). Relatively healthy labour data prints along with modest recovery in commodity prices and climbing consumer inflation expectations (Jan: 4.3%; Dec: 3.4%) to dim the prospects of further RBA easing over the coming months, supporting a stable AUDUSD despite the dollar’s strength; keep a neutral view on AUD.