In contrast with its European peers, Japanese assets failed to partake in the emerging “reflation” theme, with USDJPY mostly within a 1% band on a daily closing basis this week; EURJPY climbed more than 4% since mid-June. Japan May CPI came in at 0.4% y-o-y (consensus: 0.5%), signalling the tough challenges BoJ faced in its quest to achieve its 2% inflation target; we stay neutral JPY.

30 June 2017

Rates & FX Market Update

Chinese PMI Buoyed by Better Domestic and Foreign Demand

Highlights

¨   Global Markets: US 1Q17 GDP 3^rd reading came in at 1.4% q-o-q SAAR (consensus and prior reading: 1.2%), while weekly claims data remained at comfortable levels without any major surprises. UST yields continued to tread moderately higher alongside surging European bond yields, with 2y and 10y c.2-4bps wider overnight, as global central banks signalled the first steps in normalising monetary policies led by Fed’s FFR hikes; stay neutral USTs. Even as several ECB sources sought to downplay Draghi’s apparent hawkish statements, markets continued to position towards an eventual hawkish shift, with 10y EGB yields c.5-12bps higher overnight, while EURUSD climbed to 1.1442 (+0.57%). German June CPI came in at 1.6% y-o-y (consensus: 1.4%), with investors likely to keep a keen eye on EU CPI print later today for signs of any emergent inflation across the bloc; we are mildly bullish on the EUR over the near term.

¨   AxJ Markets: Chinese June PMI prints climbed higher, fuelled by improving domestic demand along with stronger exports. Official manufacturing PMI printed 51.7 (consensus: 51.0; May: 51.2), while services PMI printed 54.9 (May: 54.5). Amid softer movements on the USD, the USDCNY pair broke the 6.80 support convincingly, ending yesterday’s session at 6.7870/USD, where we expect tight scrutiny on Asian currencies by US Treasury coupled with plans to further internationalise the CNY to limit FX interventions by PBoC to drive the CNY materially weaker, underscoring our neutral view on CNY going forward.

¨   In contrast with its European peers, Japanese assets failed to partake in the emerging “reflation” theme, with USDJPY mostly within a 1% band on a daily closing basis this week; EURJPY climbed more than 4% since mid-June. Japan May CPI came in at 0.4% y-o-y (consensus: 0.5%), signalling the tough challenges BoJ faced in its quest to achieve its 2% inflation target; we stay neutral JPY.

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