Trump to Remain a Key Market Catalyst in the Week Ahead

27 February 2017

Rates & FX Market Weekly

Trump to Remain a Key Market Catalyst in the Week Ahead

Highlights

Global Markets

¨   While the week ahead in the US are stacked with key data releases, including the 2nd GDP reading, PMIs and core PCE, President Trump’s address to congress is also expected to be a significant event, where any hints of fiscal spending and/or tax reforms may continue to drive the reflation euphoria. We do not expect any precise details to surface during Trump’s speech, while any geopolitically-linked comments made are likely to move markets as well, particularly EM economies including Mexico and China. We still think the Trump dollar reflation trade has further room to run over the coming months; stay mildly bullish USD.

¨   UK PMI prints due in the week ahead are likely to take the spotlight, alongside any Brexit-related news flow as the self-imposed deadline to trigger Article 50 draws close. Expect renewed GBP volatility after UK pulled the trigger, as European leaders appear set for a brutal negotiation; stay bearish GBP. Over in the EU, investors are likely to keep a keen eye on CPI and PMI prints due, but unlikely to shift ECB’s March meeting expectations, where we expect an unchanged decision. French and Dutch election news flow should remain the major macro driver in the weeks ahead; stay mildly bearish EUR.

¨   Over in Japan, clarity on BoJ bond buying operations is likely to remain supportive of JGBs on the long end of the curve while movements on JPY remain heavily influenced by appetite for USD, overshadowing economic data release over the week; stay neutral JPY. Australian watchers are likely to focus on the 4Q16 GDP print due (consensus: 1.9% y-o-y), as well as the January trade balance that is likely to be bolstered by the recent uptick in commodity prices, despite the firmer AUD YTD; we retain our neutral AUD stance for now.

AxJ Markets

¨   China kick starts the week with a series of PMI data releases where the stabilising expansions across the manufacturing and services sector could help to bolster confidence ahead of China’s 12^th National People’s Congress. Rising inflationary pressure would underpin a neutral PBoC stance and support a steeper CGB curve over the medium term. Disappointments in Singapore’s IP could spill over the coming week in the run up to manufacturing PMI data release, weighing moderately on SGD. Despite so, we remain biased towards a status quo MAS in April, given room for flexibility in fiscal policies over the coming years; expect SGS to continue taking directional cues from USTs, with the small premium over UST likely to be fuelled by flushed domestic liquidity. Strength on KRW is likely to be tested over the coming week as South Korea releases the IP and trade data given concerns on sustainability of recent outperformances in trade and manufacturing. Additionally, the Constitutional Court will also hold its final impeachment hear over the coming week, which could potentially fuel further uncertainty; prospects for further BoK rate cut could continue to favour the short to mid KTB tenors. Elsewhere, the increasingly modest likelihood for BoT to cut policy rates over the near term is likely to be reinforced by the strong export data and manufacturing PMI print due in the week ahead. As such, we expect steepening pressures to mount on the ThaiGB curve over the medium term amid higher inflationary pressures; keep a neutral view on THB.

¨   Other than the usual Nikkei Malaysia PMI release at the start of the month, BNM will reconvenes on 2 March, where we expect a status quo decision amid the fragile global economic outlook and still-weak confidence towards Malaysian assets, especially towards the MYR; USDMYR remained near the 4.50 psychological level. We also do not expect any change in monetary policy stance for now; stay neutral MGS. Over in Indonesia, a faster-than-expected uptick in February CPI print may drive IndoGB yields higher, as BI dovish bets fade off amid an increasingly uncertain global backdrop. While we still expect a 25bps BI rate cut over the near horizon, any negative shocks could push the bank into the defensive; stay neutral IndoGBs at current levels. In India, the 4Q16 GDP print due will shed some light on the potentially negative impacts of the surprise demonetisation effort, although the impact on Indian Rates & FX are expected to be limited; 10y Gsec yields above 7% could offer tactical long opportunities.

  

Weekly Positioning

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