21 April 2017
Rates & FX Market Update
Stable Sentiment Heading Into the French Presidential Election
¨ Global Markets: The US reflation theme got a boost overnight following Treasury Secretary Mnuchin’s optimism that a major tax reform may come very soon, further supported by decent initial and continuing claim numbers and a strong TIPS auction. 2y and 10y UST yields climbed 1-2bps overnight, although the DXY remained relatively unchanged; we reiterate our neutral UST stance. Over in the EU, EUR managed to hold its ground against the USD after a Harris poll revealed a 0.5ppt boost to Macron, while National Front’s Le Pen saw a 1ppt dip in support, compared to last week’s Harris poll; 2y and 10y OAT yields fell c.1-3bps overnight, while yields on Bunds widened. The tight 4-way race into the first round of polling this Sunday continues to introduce uncertainties among market participants, which could extend into the second round if either Le Pen or Melonchon advances; stay mildly bearish EUR.
¨ AxJ Markets: USDMYR broke the 4.40 psychological support overnight, and continued to dip this morning towards 4.39, as movements throughout AxJ appeared subdued. Malaysia’s foreign reserves data due later today may offer some insights into BNM’s FX stance and investors’ sentiment towards the country; we stay neutral MYR over the near term. Elsewhere, BI held its benchmark policy rate at 4.75% with a neutral policy inclination, although a senior official mentioned the possibility of rate hikes if condition necessitates it. The policy flexibility towards both ends of the spectrum should continue to underpin relative FX stability within the region; we remain neutral IDR, as the currency remains attractive on a carry basis.
¨ USDJPY jumped 0.40% overnight after BoJ Governor Kuroda stated that he does not see any restrictions to the bank’s ability to implement its policies, and that the current pace of asset purchases “would continue for some time”. He also reaffirmed that the bank’s policy remains targeted towards price stability, where we judge the probability of being called out as a FX manipulator over the near term remains very low; stay neutral JPY.
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