Fed Reinvestment Policies Pushed Into Spotlight After FOMC Minutes

6 April 2017

Rates & FX Market Update

Fed Reinvestment Policies Pushed Into Spotlight After FOMC Minutes

Highlights

¨   Global Markets: Intraday UST movements were mixed overnight, as the strong ADP counterbalanced the softer services PMI / ISM services. The hawkish FOMC minutes initially drove losses in USTs, with the committee signalling that a balance sheet tapering are on the hooks as early as this year; USTs subsequently retraced late in the session given chatters that any tapering may constrain the extent of FFR hikes this year away from the hawkish view of a total of 4 FFR hikes this year. We think that the pace of balance sheet tapering will have an impact on the FFR trajectory, given our view that the Fed remains reluctant to commit to a faster pace of monetary tightening, affirming our revised view of an additional 2 FFR hikes in 2017; stay neutral USTs. GBPUSD climbed 0.36% overnight after March Services PMI beat consensus estimate (55.0; consensus: 53.4; Feb: 53.3), bolstering the composite PMI print after the disappointing manufacturing PMI. While the pair appears to hold above its 50DMA and 100DMA for now, investors’ attention remains fixated towards Brexit negotiations with the EU amid several contentious issues; stay mildly bearish GBP.

¨   AxJ Markets: Malaysia February trade data was robust, with export and import growth surging to 26.5% and 27.7% y-o-y respectively (Jan: 13.6%, 16.1% respectively), driven by broad-based strength across major categories as well as trading partners. We continue to see robustness in Malaysia’s core fundamentals, eyeing an eventual USDMYR breakthrough below the 4.40 psychological support, although the dollar strength remains a near-term concern; stay neutral MYR.

¨   USDTHB climbed 0.30% overnight, and the biggest loser under our AxJ coverage, as BoT’s plan to reduce bill issuances sparked concerns of further measures by the authorities to mitigate strength on THB over the medium term. With current headline inflation running at sub-1%, we think there could be a very modest chance for a 25bps rate cut in 2Q17, if external conditions stabilise and THB strengthening pressures persist. In any case, we continue to eye mild THB depreciations over 2017 given BoT’s preference to limit excessive THB movements on either side, compounded by lingering uncertainties surrounding the current political climate; a neutral THB stance remains appropriate.

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