UK Snap Elections and ECB’s Decision to be Closely Watched

8 June 2017

Rates & FX Market Update

UK Snap Elections and ECB’s Decision to be Closely Watched

Highlights

¨   Global Markets: Volatile movements were seen on EURUSD yesterday, with the pair reaching an intraday low of 1.1205 before recovering to 1.1259 towards the end of the trading session, after reports suggesting that ECB could dial back on its inflation outlook surfaced given recent retracements in energy prices. While the bank is widely expected to tone down its reference towards further policy accommodation, any additional comments from ECB’s Draghi addressing the recent strength in EUR could limit the upward climb on EUR over the coming week. We maintain our neutral view on EUR while keeping a mild overweight duration view on EGBs.

¨   AxJ Markets: Chinese foreign reserves climbed faster than expected, adding another USD24.0bn m-o-m to USD3.05trn, bolstered partially by revaluation effects. Going forward, the easing net capital outflows, commencement of Hong Kong Bond Connect, alongside PBoC’s effort to rebuild foreign reserves holdings are likely to be a positive for CNY, underpinning our inclination towards a neutral view on CNY over the medium term, with a view for the USDCNY pair to remain below the 7.00 psychological resistance for the year. Over in Malaysia, foreign reserves rose to USD98.0bn (+USD0.7bn m-o-m), covering 8.1months of retained imports (previous: 7.8months) or 1.1x external debt (previous: 1.1x). We maintain our neutral view on MYR over the medium term as Malaysia’s foreign reserves coverage remained the lowest among our AxJ coverage, which keeps the MYR susceptible to external gyrations against the backdrop of high foreign ownership. High nominal yields in the MGS space bolster the relative allure of MGS, underscoring our neutral duration view over the medium term.

¨   GBPUSD held marginally below the 1.30 resistance ahead of the UK snap election today, as polls consistently indicate a comfortable c.5-10% lead for the Tories, which could bolster PM May’s hand in Brexit negotiation. Electoral results are likely to be out in the early Asian trading session tomorrow, where we expect a victory for PM May’s Tory party to fuel a temporary rally on GBPUSD towards 1.31-1.32; remain on the side-lines ahead of the election results.

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