Monday, April 17, 2017

French Election: Potential for Another Major Upset in Global Markets

17 April 2017


Rates & FX Market Weekly

French Election: Potential for Another Major Upset in Global Markets

Highlights

Global Markets
¨   Last week, we mentioned that a break below 2.30% would trigger the 10y UST yield to reach 2.20%. Since this level has been reached, further gains towards 2.08% could be seen should the ongoing geopolitical concerns in Syria and North Korea remain in focus when US VP Pence travels to Asia-Pacific including South Korea and Japan. We will nonetheless scrutinize various Fedspeaks in order to gauge Fed’s forward guidance alongside April Markit PMI Manufacturing although any linked-effect could be muted should world tensions persist; remain neutral USD and UST.
¨   Elsewhere, expect a relatively quiet week ahead in the UK due to the Easter holidays with only Retail Sales due, which is expected to soften marginally from the February print. A weak reading will likely compound on the string of mixed data due month-to-date, as UK prepares to begin formal negotiations with the EU over the future of their relationship; we stay mildly bearish towards the GBP, with hardline stances adopted by both sides likely to fuel uncertainties over the negotiations. The first round of the French Presidential elections will be held on Sunday 23rd. At this juncture, given the margin errors of opinion polls, it has become a four-way race where only 2 candidates - among centrist Macron, far-right Le Pen, leftist Mélenchon and Republican Fillon -  can reach the second round (7th May). While the uncertainty with regards to the first round results increases, it also indicates the strong dislocation of the French political landscape. As such, it could translate to an unusual follow-through on the June Legislative elections when the elected President might not be able to form a majority. Expect lingering uncertainties to weight on the Euro and widen OAT/Bund spread.
¨   Caused by increasing geopolitical risk events, the safe-haven JPY is already close to our next defined support at 108.50 against the USD. In the absence of strong onshore catalysts, the JPY strength is likely to continue while a conflict in North Korea could limit its amplitude due to the countries proximity. We eye the next support at 106.50 for the USDJPY. Over in Australia, RBA minutes due in the week ahead may offer greater insights to the April policy decision statement, where investors perceived them to be more dovish than previous statements. The strong March jobs data may not fully alleviate lingering concerns, with RBA likely to err on the side of caution until clear signs of a recovering labour market emerge; stay neutral AUD.

AxJ Markets
¨   Over in Asia, the Chinese 1Q GDP will garner some attention, with a strong print (consensus expectations: 6.8%) likely to bolster expectations for PBoC to further its deleveraging agenda this year, which could further exceed upward pressure on CGB yields. Meanwhile, no surprises are expected from China’s retail sales and IP data, which are also due in the week ahead. Elsewhere, South Korea releases a glimpse of April’s trade data, where the strong export growth is likely to be overshadowed by further spotlight onto the North Korean geopolitical tensions, weighing on KRW vis-à-vis regional peers.
¨   Turning to Singapore, robust NODX expansion in March could underscore strength on SGD over the near term, but unlikely to douse concerns of a diverging externally oriented and domestic industries. We reiterate our view for a tightening MAS monetary policy to be premature, and prefer to keep a neutral duration view on SGS over the medium term.
¨   Over in Malaysia, March CPI is expected to tick higher from the 4.5% logged in February, partially impacted by the low base in 2016. Foreign reserves data due later in the week may shed insights over April’s cross-border flows, although unlikely to substantially change the MYR’s dynamics over the near-term; stay neutral MYR. Last but not least, BI is likely to remain cautious and prudent amid elevated external risks, where we eye a status quo monetary decision when the bank reconvenes on 20 April. With USDIDR breaking below the 13,300 psychological support decisively, and reaching a new low since the US election, we remain optimistic that the IDR can deliver decent post-carry return over the year, amid BI’s preference for a stable and conducive currency.
¨   Although it is likely to be a quiet week in Thailand, we expect strong demand for the 5y ThaiGB auction scheduled on 19 April, particularly amongst offshore investors given the allure of resilient THB; keep a mild underweight duration on ThaiGBs.

  
Weekly Positioning


Rates
FX
Overweight


Mild Overweight
Core EGB
USD
Neutral
UST, GILT, ACGB, SGS, CGB, MGS, IndoGB
AUD, JPY, MYR, THB, SGD, IDR
Mild Underweight
KTB, ThaiGB
EUR, KRW, CNY, GBP
Underweight
JGB






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