20 April 2017
Rates & FX Market Update
US-EU Monetary Policy Gap to Remain Over the Near Term
¨ Global Markets: UST yields climbed 2-5bps while the dollar ticked 0.24% higher overnight, as the Fed Beige Book highlighted modest to moderate improving outlook across the US, although inflationary pressures continue to remain modest given subdued wage growth. Fed’s Rosengren indicated that balance sheet tapering “can begin soon”, while Fed’s Fischer downplayed the impact of US rate hikes on the global economy. We remain neutral towards USTs, given FOMC’s hawkish inclination balanced by an anaemic global outlook. Elsewhere, EU March Final CPI delivered no surprises, affirming a steady albeit subdued pace of price gains. ECB’s Villeroy, Praet and Coeure all voiced support for the current monetary policy trajectory, cautioning against removing any stimulus too soon before a sustained recovery emerges; we maintain our mild overweight Bunds call.
¨ AxJ Markets: Malaysia’s March CPI printed 5.1% y-o-y (Feb: 4.5%), continuing to reach multi-year highs given sharp jumps in transportation and fuel costs. With BNM likely to remain cognisant of rising price pressures and soft MYR sentiment, our base case remains for the bank to maintain the current monetary stance over 2017; stay neutral MGS. Elsewhere, incumbent Jakarta governor Basuki conceded the local election to Anies, with exit polls showing a c.16% margin of loss. While USDIDR surged above the 13,300 level, the impact appeared relatively subdued; we think the risks are transitory in nature, and unlikely to threaten the Central Government’s reform plans; stay mild overweight IndoGBs.
¨ While the GBPUSD pair held above the 1.28 handle over the Asian and European sessions, dollar’s strength into the US session pushed the pair down 0.48% overnight to 1.2783. PM May easily won Parliament’s approval to hold the snap election on June 8, with the Conservatives appearing likely to extend its 17-seat working majority lead against Labour. However, the election is not without risks, given UK’s past polling volatility and the likelihood for opposition parties to mould the election into a referendum of PM May’s Brexit strategy; we are now neutral towards the GBP, with the Cable potentially testing 1.30 over the near term if dollar failed to rebound materially from current levels.
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