Wednesday, March 15, 2017

USD strengthened just ahead of FOMC this week, against peers EUR, GBP, and CAD b

Market Roundup
  • Longer tenor US Treasuries rallied despite little in terms of economic data and just ahead of this week’s FOMC meeting which markets see as highly likely the Fed will hike interest rates again. In essence, a 25bps hike has been well priced in. Thus, fresh gains in UST possibly reflect outlook on rates post FOMC. Fed funds futures trading still signal a 100% probability of a Fed hike. In economic data, the headline PPI for Feb rose 0.3% mom against 0.1% consensus expectations but lower against +0.6% mom in Jan. PPI ex-food and energy was +0.3% mom in Feb against 0.2% consensus and Jan’s 0.4%. Data out tomorrow include CPI, retail sales, Empire manufacturing and business inventories before anticipated FOMC decision the same day.
  • USD strengthened just ahead of FOMC this week, against peers EUR, GBP, and CAD but JPY also strengthened as equities markets weakened. BoJ is due to announced result from its own policy meeting Thursday, after FOMC, and we will observe if the central bank hikes its outlook for the economy and whether it announces a taper of its asset purchases program (its current plan is to expand holding of bonds by JPY80 trillion per year). In Japan, despite signs of firmer GDP (sustaining around 1% in 4Q2016) inflation remains mild. But a more upbeat assessment of Japan’s economy would support JPY, especially in environment of firm USD.
  • MYR government bonds posted gains but flows were thinner except for heavy interest on the new 5-year MGS and current 7-year proxy (both of which saw gains - down 1bp and 9bps respectively). Other tenors were relatively thinly traded with players opting to watch from the sidelines with FOMC coming up. Meantime, IRS rates were a tad higher, due mostly to readjustments after the overnight rise in UST yields.
  • MYR government bonds posted gains but flows were thinner except for heavy interest on the new 5-year MGS and current 7-year proxy (both of which saw gains - down 1bp and 9bps respectively). Other tenors were relatively thinly traded with players opting to watch from the sidelines with FOMC coming up. Meantime, IRS rates were a tad higher, due mostly to readjustments after the overnight rise in UST yields.
  • MYR credits also saw a lack of interest, mirroring the govvies trading. And what were traded were mostly on weaker ground. Heaviest traded was AA3 LDF3 Aug’34, but on firmer ground, down 18bps to 5.26%. If we take into account that LDF3 Aug’33 was last dealt at 5.20%, and LDF3 Aug’35 was at 5.30%, then LDF3 Aug’36 at 5.41% looks attractive if we don’t mind the longer duration.
  • Thai bond yields increased 1bp on almost all tenors ahead of FOMC (Thursday 1am Bangkok time). The 20-year bond rose 2bps, faster than other tenors as players prepared for auction of LB366A (Bt8.0 billion). We expect the new supply to be firmly absorbed by the market as it now looks attractive at 3.41%, higher than average bidding yield of the prior auction (3.36%). We think there is pent-up demand among insurance companies and long-term buyers.  
  • IDR government bonds were traded up on auction day, as the government downsized the issuance to IDR11.35 trillion from earlier IDR15 trillion target. Incoming bid was quite decent at IDR26.4 trillion, with bid-to-cover ratio for the 5-year FR61 at 4.32x, while the 15- and 20-year papers saw bid-cover higher than 2x. The strong auction demand caused players to scramble for cover on those bonds, as well as buying in the 10-year space.

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