19 April 2017
Rates & FX Market Update
UK Snap Election Set to Bolster Conservatives’ Majority in Parliament
¨ Global Markets: USTs staged another strong rally overnight, with 2y and 10y yields declining c.4-8bps after reports that Pentagon is considering shooting down any North Korean missile launches, amid softening expectations that President Trump will deliver much-needed tax reforms within a reasonable timeframe given the geopolitical situation. We expect the USD to face near-term downward pressure as investors actively reconsider the reflation theme, till market attention shifts towards the June FOMC meeting, which may then offer some reprieve to the dollar; stay neutral USD. PM May called for a snap election on June 8, which sent the GBPUSD 2.21% higher overnight, given that the results are likely to strengthen UK’s hand heading into Brexit negotiations. With polls indicating a comfortable c.20-point lead for the conservatives (against Labour), PM May is likely to boost her party’s majority in Parliament, although the uncertainties surrounding an eventual Brexit lingers on. We are more comfortable with a neutral GBP stance over the near term, but stay cautious over the longer term, with formal negotiations likely to kick off after the German elections in September.
¨ AxJ Markets: IMF raised its 2017 global outlook, upgrading its world growth forecast to 3.5% (previous: 3.4%), driven by stronger manufacturing and trade activities; Europe, UK, Japan and China saw its growth forecasts upgraded as well. This bodes well for most AxJ economies, especially given relative stability in Chinese economic trajectory; we are largely neutral towards currencies of trading powerhouses in the AxJ region (SGD, MYR, THB), though we retain our mildly bearish tilt towards the KRW and CNY.
¨ AUDUSD fell 0.41% overnight despite the softer DXY, impacted by sharp declines in iron ore prices (c.-32% since mid-March). RBA minutes due affirmed the bank’s concerns over the Australian labour and housing markets, creating a monetary policy dilemma given the different policy responses required. We think RBA will likely stay on hold over the coming months as the bank closely monitor the developments, with our base case remaining for RBA to stand pat at 1.50% over 2017, although a mild dovish re-pricing in Australian rates may be on the cards; stay neutral AUD.
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