¨ AxJ Markets: South Korean May unemployment rate unexpectedly fell to 3.6% (consensus: 3.9%; Apr: 4.0%) on continued optimism towards President Moon’s government. While recent economic data have shown signs of strength, the country’s reliance on US and Chinese demand continue to pose uncertainties over the foreseeable future, while domestic demand stays sluggish amid an overleveraged household sector and elevated youth unemployme

14 June 2017

Rates & FX Market Update

Strong Expectations for the Fed to Answer an USD4.5trn Question

Highlights

¨   Global Markets: While the Fed is widely expected to raise its interest rate benchmark today, investors will focus on the next policy step by awaiting any communication on the balance sheet reduction and its impact on the interest rate normalisation. As such the Dot Plot will be scrutinised alongside the likely revision of the economic projections in light of the recent soft data. Mixed May PPI (2.4% vs 2.5% in April and 2.3% forecasted) did not support the reflation theme with the DXY down -0.17% and 10y UST -4 bps; remain cautious on USD and UST since the next policy move is not straightforward entering uncharted policy territories. Failing to clearly communicate will be perceived as dovish and could send 10y UST yield to new yearly lows at 2.10% in the near term. 2y and 10y Gilt yields jumped c.5-7bps higher overnight, while the GBPUSD retraced 0.65% higher, after May CPI data came in stronger than expected (2.9% y-o-y; consensus: 2.7%), and nearing its 4-year high. While the surging inflation is likely to prompt concerns among BoE policymakers, lingering contagion risks relating to an increasing uncertain negotiation prospects should keep the bank on the side of caution; we continue to see no change in the bank rate over 2017 and early-2018.

¨   AxJ Markets: South Korean May unemployment rate unexpectedly fell to 3.6% (consensus: 3.9%; Apr: 4.0%) on continued optimism towards President Moon’s government. While recent economic data have shown signs of strength, the country’s reliance on US and Chinese demand continue to pose uncertainties over the foreseeable future, while domestic demand stays sluggish amid an overleveraged household sector and elevated youth unemployment. However, we expect BoK to remain neutral over the remainder of 2017 given the current all-time low rates; stay neutral KRW.

¨   USDTHB fell 0.43% overnight, and broke below the 34 handle once again, despite efforts by BoT to mitigate the strong appreciations on the THB. Investors remain attracted by Thailand’s strong external surpluses, stabilising macroeconomic situation, and the high real yields within the AxJ markets; we retain our neutral THB stance.

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