Heavy Economic Calendar & Fed’s Forward Guidance to be Scrutinized

3 April 2017

Rates & FX Market Weekly

Heavy Economic Calendar & Fed’s Forward Guidance to be Scrutinized

Highlights

Global Markets

¨   A busy week in the US with: (i) the FOMC’s March meeting minutes likely to provide greater clarity of the committee’s thinking behind the dovish-perceived hike; (ii)  March NFP number expected to come below the 12-month average and below February’s figure at a time when Fed’s chair Yellen also noted the unevenness of the labour market’s recovery, and; (iii) Donald Trump with State Secretary Tillerson meet Chinese President Xi Jinping while news about sanction against currency manipulators are resurfacing. These elements underscore our cautious approach on US markets: the USD keeps short to medium term upside potential should the Fed continue to guide towards the next rate hike while (geo)political risks remain supportive of USTs.

¨   Over in the UK, expect the usual economic data due at the beginning of the month (PMIs, IP, Trade Balance) to be closely watched by investors; keen interest will be on UK’s economic momentum, especially with Brexit-related issues remaining on the top of investors’ mind over the coming weeks. While official guidelines from the EU will likely only be available after the European summit scheduled in end-April, ad-hoc commentaries from top officials are likely to drive European risk sentiment over the near term; maintain our cautious stance towards GBP.

¨   In Europe, the French presidential candidates will participate in the only TV debate gathering all 11 contenders on Monday.  3 major themes will be approached: employment, security, and the social model. We will eye the confrontation between centrist Macron and far-right Le Pen who are leading the tight race, and who is perceived to win the debate. The Euro will remain under pressure ahead of the first round on April 23^rd

¨   In Japan, Tankan 1Q17 surveys are expected to have improved although Capital Expenditures are likely to have strongly contracted (-0.3% vs 5.5%) highlighting that the tepid economic recovery is not followed by an investment improvement casting clouds over growth; remain neutral JPY.

¨   Lastly, RBA reconvenes on 4 April 2017, where recent economic data and developments are unlikely to provoke a significant change in the bank’s rhetoric at this juncture. Expect key data including retail sales, building approvals, trade balance and a private monthly inflation gauge to be on the radar as well; stay neutral AUD, with the currency likely to remain sensitive towards global market movements.

AxJ Markets

¨   While the Caixin PMI data due in the week ahead is likely to support China’s stabilising growth story, PBoC’s strong commitment to support deleveraging is likely to exert upward pressure on CGB yields against the backdrop of net liquidity withdrawals. However, we remain biased to a neutral duration stance, as prospect for CGBs to be added into major indices could support demand over the medium term; add CGBs on dips.

¨   Heavy South Korean economic calendar expected in the week ahead, where we eye a possible improvement in Manufacturing PMI, which has remained in contraction over the past month despite optimism seen elsewhere in the region; a strengthening PMI to likely support the USDKRW pair to test the 1100 support. Meanwhile, further pickup in CPI beyond its 2% target could cement BoK’s neutral monetary policy stance through 2017. We recommend for investors to switch to a neutral duration stance on KTBs, with the wide 3/10y spreads at its 18-month high appearing attractive for investors to shift away from a mild underweight duration stance against a backdrop of weak demand push price pressures.

¨   Turning to Singapore, further improvements on the Manufacturing PMI print could ease cautious positioning towards the SGD as investors await the advanced 1Q GDP and MAS MPS. While we maintain our status quo MAS expectations, we caution on aggressive positioning on short USDSGD positions on expectations of a relief rally on SGD, as the heavy economic data in US could sway appetite towards the USD; keep a neutral SGD view, while SGS yields are likely to take directional cues from USTs.

¨   Over in Malaysia, while key data due in the week ahead (Nikkei PMI, Trade Data and Foreign Reserves) is likely to stabilise or improve marginally, volatility in the MYR remains crushed as confidence has yet to return. With the widely watched USDMYR pair slowly drifting towards the 4.40 psychological support, a break below may be sentiment-positive over the near term, although the currency remains vulnerable towards any USD strength; stay neutral MYR.

¨   While we expect BoT to keep the policy rate unchanged at 1.50% over the course of the year, BoT’s preference for a slightly softer THB could fuel a small and non-negligible chance of a 25bps rate cut in 2Q, which could anchor short dated ThaiGB yields over the near term, underscoring our mild underweight duration view. Eye the downward trending USDTHB pair towards the 34.0 handle, where we expect the major support at that level to hold over the medium term.

¨   Elsewhere, with market expectations rapidly shifting towards a neutral BI stance, a faster-than-expected uptick in CPI may only have a diminishing impact on IndoGBs, with recent gains likely to be driven by positive sentiment towards Indonesia alongside renewed hopes of an eventual S&P credit rating upgrade; remain constructive on IndoGB duration.

  

Weekly Positioning

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

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