AxJ Markets: China’s exports and imports remained resilient, growing by 8.0% and 11.9% y-o-y (consensus: 11.3%; 18.0%), with trade surplus widening to USD38.1bn (Mar: USD23.9bn). While Chinese exports are likely to remain supported by the steady external demand, the authorities’ strong resolve to deleverage could dampen Chinese demand for i

9 May 2017

Rates & FX Market Update

FFR Futures Indicate 100% Probability of June Hike, Pressuring USTs

Highlights

¨   Global Markets: Easing uncertainty from French elections alongside hawkish Fedspeak supported upward climb on UST yields, with 10y yields edging back to 2.40% major resistance. Fed’s Mester reinforced the need for a gradual pace of FFR hikes that commensurate improving economic outlook; probability of a 25bps June FFR hike indicated by FFR futures rose to 100% which could support further underperformance in USTs as investors increasing shifts away from risk off positioning. Meanwhile, EURUSD tested by failed to breach the 1.10 handle as challenges awaiting French President Macron compounded ahead of the French Legislative Elections where the need for Macron’s En Marche Party to form a coalition government if he fails to garner an absolute majority could exert influence on President Macron’s campaign promises; investors likely to continue pricing a wide discount on OATs over Bunds.

¨   AxJ Markets: China’s exports and imports remained resilient, growing by 8.0% and 11.9% y-o-y (consensus: 11.3%; 18.0%), with trade surplus widening to USD38.1bn (Mar: USD23.9bn). While Chinese exports are likely to remain supported by the steady external demand, the authorities’ strong resolve to deleverage could dampen Chinese demand for imports, fuelling the contentious widening trade surplus against US (Apr: remain sticky at the 6.90 handle, with a bias for any CNY depreciation to remain gradual. Indonesia’s foreign reserves climbed to USD123.3bn (+USD1.2bn m-o-m), underscored by increased tax revenues and proceeds from oil and gas exports. ReseUSD21.3bn; Mar: USD17.7bn); expect the USDCNY to rves to imports ratio rose to 8.6 months (including government foreign debt repayments), which is likely to bolster resilience of IDR and boost the allure of the higher yielding IndoGBs against regional Asian peers. Keep a neutral duration stance on IndoGBs given the tight 3/10y spreads alongside low likelihood for further BI rate cuts.

¨   The AUDUSD pair continued its downward descend overnight to 0.7386 (-0.35%), as the weakening commodity prices continue to exert pressure on the resource exporter. While we expect RBA to maintain a neutral monetary policy amid financial stability concerns, further weakness on commodity prices towards lows seen in 2016 could dull the near term outlook for Australian economy, compounding on the narrowing RBA-Fed policy rate differentials; maintain a cautious stance on AUD as it seeks to test the 0.73 support.

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