Tuesday, March 14, 2017

10y UST Climbed Above the 2.60% Handle Ahead of FOMC Decision

14 March 2017


Rates & FX Market Update


10y UST Climbed Above the 2.60% Handle Ahead of FOMC Decision

Highlights

¨   Global Markets: Yields on 10y UST ended the overnight session above the 2.60% handle for the first time since September 2014 as we edge closer to FOMC’s rate decision due on 15th March. The steady improvements in economic data over the past quarter could prompt the FOMC to retain its hawkish stance post March FFR hike, underscoring our preference to keep a neutral duration view on USTs over the near to medium term. While little insights could be gathered from ECB’s Draghi speech yesterday on monetary policy, EURUSD trended lower to 1.0654 yesterday (-0.30%) as the geopolitical landscape mounts ahead of the Netherlands election. Downward pressure on the EURUSD pair is likely to persist over the near term, underpinned by widening US-EU interest rate differentials alongside risk stemming from elections within the bloc; position for a mildly bearish EUR.
¨   AxJ Markets: Malaysia’s IP eased in January, expanding by 3.5% (Dec: 4.7%) against consensus expectations of 5.3%. Despite the surprise in IP, MYR remained stable at 4.4465/USD yesterday, where the undervalued NEER alongside expectations for a steady economic recovery buoyed by the domestic economy is likely to mitigate bearish pressures on MYR over the medium term, supporting our neutral view on MYR. Yields on 10y MGS inched lower by 1bp overnight to 4.17%, where we opine for value of MGS to remain compelling vis-à-vis its regional peers, reiterating our neutral duration view on MGS.
¨   The prospect of a supplementary budget to be released in 2H17 by a newly elected President further diminished the likelihood of another BoK rate cut, buoying strength on KRW to 1144/USD (+1.14%). Coupled with the recent improvements on external export demand seen for the region, we expect an aggressive fiscal spending to take the limelight as concerns for elevated household debt and tightening interest rate differentials with US constrain BoK rate cut decision; we reiterate our cautious stance for long KRW positions as the currency remains susceptible to external gyrations over the medium term.

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