17 March 2017
Rates & FX Market Update
BoE Dissent Vote Fueled Gains on GBP Ahead of Article 50 Trigger
¨ Global Markets: While US economic data releases were mixed yesterday, FFR futures indicated that probability for FFR hike in June increased from 50.2% to 53.5%, prompting a retracement on UST yields, with the 10y climbing back to 2.54% (+5bps). Keep a neutral duration stance on USTs over the coming weeks while Congress debates on US President Trump’s federal budget, with steep cuts to domestic departments likely to be challenged in Congress.
¨ AxJ Markets: Singapore’s NODX surged by 21.5% y-o-y (Jan: 8.6%), with expansion of NODX largely led by China, South Korea, and Taiwan. While the improving external demand is likely to diminish MAS easing prospects in 2017, we prefer to keep our mildly bearish stance on SGD as strong dependence on Chinese demand fuels susceptibility to external gyrations; yields on SGS recorded gains, mirroring post FOMC gains on USTs where we opine for the close correlation between SGS and USTs movements to be sustained over the near term. PBoC raised the 7-day, 14-day, and 28-day reverse repo rates by 10bps to 2.45%, 2.60%, and 2.75% yesterday, in tandem with FFR 25bps rate hike. Separately, PBoC has also raised the 6-month and 1-year MLF rates by 10bps to 3.05% and 3.20%, its second increase in 6 weeks, demonstrating its commitment towards mitigating excessive credit growth as economic growth stabilises. While yields on CGBs remained largely stable yesterday, downward pressure was evident on the USDCNY pair which traded past the 6.90 support. We continue to position for a mildly bearish CNY, with expectations for a 3-4% depreciation against USD this year, but expect higher two-way volatility on the USDCNY pair over the coming year.
¨ BoE’s decision to hold the Bank Rate at 0.25% was not unanimous, with outgoing BoE member Forbes voting to increase the Bank Rate by 25bps given declining tolerance for CPI to materially overshoot its 2% target (Jan: 1.8%). The hawkish surprise supported strength on GBP overnight to 1.2358/USD (+0.55%), even as the overhang of the imminent Article 50 trigger at the end of the month continued to exert bearish pressure on GBP. While GBPUSD could seek to test its 1.21 support as formal Brexit negotiation materialises over the coming weeks, declining propensity for a dovish BoE should limit extreme downward pressure on GBP over the medium term.
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