Heavy Chinese Data, Yellen’s Testimony to Keep Markets Busy

10 July 2017

Rates & FX Market Weekly

Heavy Chinese Data, Yellen’s Testimony to Keep Markets Busy

Highlights

Global Markets

¨   In the US, Fed’s chair Janet Yellen might try to address the recent concerns and growing skepticism towards the central bank’s tightening cycle against the backdrop of softening inflationary pressure as she delivers the semi-annual Monetary Policy Report to Congress. In that sense, Retail Sales, Producer and Consumer Prices will also be the highlight of a rather quiet economic week. We maintain a cautious stance on USTs for the time being on weak price pressure amid a bond sell-off despite global tensions.

¨   In the UK, labour data due in the week ahead will be closely scrutinized, given the fragile balance within BoE’s MPC that may complicate policy trajectory over the coming months. Strong labour data may reaffirm the committee’s bias to tighten over the coming months, despite ongoing Brexit negotiations that appear to start off on a rough footing. We maintain our neutral GBP over the near-term, although risks remain skewed towards the upside if more BoE hawks emerge amid a consolidating USD / stronger EUR trend. In Europe, as the ECB stance continues to turn increasingly hawkish overlooking the weak inflationary forces, the 10y German Bond yield surpassed the key 0.50% handle underscoring our downgrade to neutral on core EGBs. In the week ahead, Industrial Production for the zone is expected to corroborate ECB’s acknowledgment of the economic recovery. Donald Trump’s visit to Paris could be thrust into the limelight given his unknown foreign policy stance and rather aggressive tone towards the EU while facing pro-European French president Emmanuel Macron. On the currency side we maintain our view for the EURUSD to reach close the long-term range top at 1.1550 in the near future.

¨   In Japan, Machine Orders are expected to have rebounded in May contributing to the positive economic recovery less inflation story; producer prices are anticipated to remain unchanged in June. Monetary policy discrepancy are likely to keep the JPY on a softer foot in the near term; the USDJPY pair might find some resistance at the 115 handle. Lastly in Australia, expect a relatively quiet economic calendar in the week ahead with only home loans and business / consumer confidence data due. While RBA is reluctant to join the side of the hawks at the moment, ACGB yields were pressured higher by rising global yields and hawkish speculative bets. Directionality of Australian assets will likely to be dictated by global movements in the week ahead; stay neutral ACGBs.

AxJ Markets

¨   In China, we see an extremely heavy data week ahead with multiple tier-1/2 data due. Progress of China’s deleveraging efforts are likely to be monitored upon the release of aggregate financing prints, with the sanguine economic outlook portrayed by the robust trade data fuelling the government’s resolve to tread further on its reform path. Yields on CGBs are likely to continue consolidating over the coming months, where we view the comparatively higher yields to be attractive; keep a neutral stance on CGB duration; expect further consolidation on USDCNY ahead of the Chinese leadership transition at the end of the year. Over in South Korea, BoK reconvenes on 13 July, where we expect the bank to maintain its neutral stance given high household leverage and external uncertainties, overshadowing the brighter economic data seen so far. Geopolitical tensions with North Korea remain a lingering downside risk, despite the apparent dwindling of importance among market-moving Korean news flow given the constant aggression; stay neutral on the KRW.

¨   Moving on to Singapore, May’s retail sales data alongside the 2Q17 advance GDP print is expected to be released, where the strong external demand is likely to underscore another healthy quarterly GDP print, further supporting resilience on SGD against its regional FX peers and USD. Additionally, we expect the ample domestic liquidity to continue supporting the wide SGS-UST spreads over the coming weeks; stay neutral SGS. Elsewhere in Thailand, expect a relatively quiet week ahead with only Thai foreign reserves data due, where global and regional market movements will likely dictate the directionality of ThaiGBs and the THB. With USDTHB hovering marginally above the 34.0 handle and the 33.90 support presenting the next hurdle for the pair; we see a smaller likelihood for sustained THB weakness given tight scrutiny by US Treasury on THB movements alongside strong external surpluses fuelled by capital inflows and robust trade surpluses, underscoring our neutral THB view.

¨   Over in Malaysia, the bi-monthly BNM meeting scheduled on 13 July is not expected to deliver a shocking surprise to Malaysian watchers, given stable economic trends and market fundamentals since the last May meeting. While the governor may shift towards the hawkish scale given his more pro-active approach to monetary policymaking, our base case remains for a largely unchanged policy stance, with economic data signalling no urgent need for revision at this juncture; stay neutral MGS. With no key Indonesian economic data due in the week ahead, Indonesian assets are likely to take cues from global market movements. EM assets may be under major threat if global central banks continue to lean towards the hawkish end, due to both eroding carry differentials and tightening surplus liquidity.

  

Weekly Positioning

	Rates	FX
Overweight
Mild Overweight		EUR
Neutral	UST, GILT, Core EGBs, ACGB, SGS, CGB, KTB, MGS, IndoGB	USD, GBP, AUD, JPY, MYR, THB, SGD, IDR, CNY, KRW
Mild Underweight	ThaiGB
Underweight	JGB

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