Global Markets: 10y USTs and the DXY continued its slide overnight, as major central banks around the world began to turn hawkish amid signs of emerging inflationary pressures and greater confidence towards the respective economic outlooks. 7y UST auction overnight tailed for the first time since October 2016 (WI: 2.053%; H

29 June 2017

Rates & FX Market Update

BoE’s Carney Turned Hawkish in an Abrupt Reversal

Highlights

¨   Global Markets: 10y USTs and the DXY continued its slide overnight, as major central banks around the world began to turn hawkish amid signs of emerging inflationary pressures and greater confidence towards the respective economic outlooks. 7y UST auction overnight tailed for the first time since October 2016 (WI: 2.053%; HY: 2.056%; BTC: 2.46 versus 2.55 past 6 averages) as investors remain wary of the current correction in rates; stay neutral USTs over the medium term. EURUSD continued its uptrend (+0.35% overnight) even as ECB’s Draghi offered little fresh insights in the panel discussion with fellow central banks’ chiefs, following his hawkish-leaning comments earlier. A convincing breakout above our stipulated 1.134 resistance overnight may continue to push the pair towards 1.155 over the near-term; switch to a mildly bullish stance on EUR. In contrast to the other panellists in ECB’s Sintra conference, BoJ’s Kuroda maintained his cautious tone towards removing monetary stimulus, highlighting that Japanese firms are still reluctant to boost capital investments despite healthy earning levels. Given the huge BoJ’s balance sheet, any exit would have to be carefully crafted to avoid disrupting Japanese and global monetary conditions. BoJ’s Kuroda term comes to an end in early-2018, although policy continuity is unlikely to be threatened, given the moderately high probability that himself or his deputy will be appointed by PM Abe; stay neutral JPY.

¨   AxJ Markets: Over in South Korea, both manufacturing and services confidence dipped from its June prints, after improving in the prior months ahead of the election. USDKRW climbed 0.64% overnight, the weakest among our AxJ coverage, weighed by renewed geopolitical tensions as China cut fuel exports to North Korea; we stay neutral on the KRW, and eye the upcoming US-South Korea summit for any hints of an upcoming resolution.

¨   BoE’s Carney joined ECB’s Draghi and BoC’s Poloz in a surprise reversal of monetary policy stance, hinting that the time to raise UK rates could be near, with the committee likely to debate a hike over the coming months; GBPUSD climbed 0.91% overnight to c.1.293. We keep a close eye on key UK data due over the coming weeks, and maintain our neutral GBP stance for now.

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