15 March 2017
Rates & FX Market Update
Strong Gains on INR Buoyed by BJP’s Victory in State Elections
¨ Global Markets: Modest profit taking was seen on the UST curve ahead of FOMC decision later today, with yields on 10y holding marginally above the 2.60% handle. Tone from the FOMC statement and Yellen’s press conference would remain closely scrutinised, with hints signalling further FFR hikes beyond consensus and likely to support USD’s rally. Additionally, we opine for any mention of plans for Fed’s balance sheet reduction to be reflective of FOMC’s view on a steady economic recovery which could spur positioning for 3 FFR hike this year; keep a neutral duration view on USTs.
¨ AxJ Markets: Strong expansion on China’s IP (Feb: 6.3%; Jan: 6.0%) contrasted with the softening retail sales print YTD (Feb: 9.5%; Jan: 10.4%), igniting concerns of a decelerating domestic consumption. While China’s GDP 2017 growth target has been set lower at 6.5%, further structural reform efforts and tightening credit growth could pose a challenge. Movements on CGBs remained muted yesterday, where we opine for a neutral monetary policy stance from PBoC to likely limit gains on the curve over the medium term; maintain neutral stance. South Korea’s unemployment rate surged to 4.0% (Jan: 3.6%), with the unemployment rate for aged 15-29 remaining elevated at 12.3% despite initiatives announced by the previous President in 2015. With the Presidential Elections edging closer, likelihood of further BoK rate cut over the near term continues to dim as focus fixates on the possibility of a large fiscal supplementary budget, spurring a steepening KTB curve over the coming months; keep a mild underweight duration view on KTBs.
¨ Despite strengthening USD movements yesterday, the USDINR pair registered a sharp fall of 1.18%, supported by optimism stemming from BJP’s electoral victory in state elections, cementing Prime Minister Modi’s position. Earlier concerns of declining support for BJP party following the demonetisation have eased, allowing Modi’s government to push through further reforms. Accelerating WPI (Feb: 6.6%; Jan: 5.3%) has reinforced RBI’s hawkish signal, where we see a lower likelihood for further rate cuts which could help to mitigate upward pressures on USDINR over the coming months.
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