Sustained Gains on GBP Ahead of Article 50 Trigger Tomorrow

28 March 2017

Rates & FX Market Update

Sustained Gains on GBP Ahead of Article 50 Trigger Tomorrow

Highlights

¨    Global Markets: With the propensity for an aggressive monetary tightening from FOMC hinging on the Trump administrative to furnish the infrastructure spending and tax cuts, the weak support for President Trump over the previous Congress session has fuelled strong gains on USTs, bringing 10y yield back to the 2.32% support. Fed’s Evans speech yesterday echoed investors’ concerns, where he commented that the uncertainty surrounding the fiscal outlook could limit the extent of monetary tightening this year. Positioning within the FFR futures however, remain optimistic, pricing in a 50.2% probability of a June FFR hike. We opine for a neutral duration stance on UST to remain appropriate, as further compromises from the Trump administration and Congress continues to emerge over the coming weeks; eye USDJPY as it begins to test the major 110 support.

¨    AxJ Markets: South Korea’s 4Q GDP print was revised higher to 2.4% y-o-y (previous: 2.3%) supported by stronger construction activity, bringing the FY16 GDP expansion to 2.7%. The USDKRW pair declined to 1,113 yesterday (+0.86%), where the strengthening KRW vis-à-vis regional peers could dampen South Korea’s export competitiveness over the medium term. Position for a mildly bearish KRW over the medium term, where we see opportunities to extend long USDKRW position at the 1,100 handle. Meanwhile, gains on KTBs remained in line with the global market, where we remain of view for diminishing likelihood for another BoK rate cut to clip duration appetite for offshore investors amid rising price pressures; keep a mild underweight duration stance.

¨    The GBPUSD pair surged higher to 1.2561 yesterday (+0.55%) even as UK is due to trigger Article 50 to formalise Brexit proceedings. Over the past weeks, while softer USD movements coupled with improving UK economic data and increasing hawkish BoE inclination remained supportive of GBP strength, the likelihood of a tough stance from EU officials could undermine business investment decisions over the medium term. As such, we remain biased towards a mildly bearish GBP over the near term, with investors remain wary on overextending long positions at this juncture.

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