July FOMC Statement Largely Stick to its Previous Script

27 July 2017

Rates & FX Market Update

July FOMC Statement Largely Stick to its Previous Script

Highlights

¨   Global Markets: DXY and UST yields dipped 0.4% and c.4-5bps overnight after the FOMC statement acknowledged the softening inflation below the 2% target, while taking a more positive stance on employment and consumer spending. The committee also expects to begin balance sheet normalisation “relatively soon”, where we think an announcement could come in the September meeting. We eye 10y UST yields to hover around 2.1-2.4% ahead of the September FOMC meeting, and we maintain our neutral UST duration view given fading inflationary pressures and lingering political disruptions. Elsewhere, UK 2Q17 GDP came in line with consensus expectation at 1.7% y-o-y (1Q17: 2.0%), dragged by weaker manufacturing and construction activity. Overall growth in retail sector remained lacklustre over 1H17, with the outlook remaining pessimistic as consumers continued to get squeezed by negative real wage growth. We continue to affirm our neutral BoE view over the coming months, despite greater willingness among some committee members to tighten policies soon; stay neutral Gilts. Lastly, 2Q17 Australian CPI slowed to 1.9% y-o-y (consensus: 2.2%; 1Q17: 2.1%), providing further affirmation for RBA to remain on the side-lines for now. While AUDUSD initially dipped to c.0.788 after Governor Lowe rejected the notion to track the rising hawkishness among major central banks and maintained his preference for a weaker AUD, the pair surged past the 0.800 psychological resistance during late US session post-FOMC; we do not advise chasing the AUD on the long side at this juncture.

¨   AxJ Markets: Over in South Korea, 2Q17 GDP matched expectations at 2.7% y-o-y, driven by robust growth in the services sector. Amid the lack of price pressures, BoK is likely to keep policy rates unchanged at 1.25% through early 2018, underpinning our neutral KTB duration view.

¨   EURUSD climbed 0.83% overnight to 1.1744, driven by perceived dovishness in the FOMC statement that weighed on dollar crosses, and ECB’s Nowotny comments that negative rates could lead to market distortions, as well as supporting a winding-down of ECB stimulus as early as September. With elevated expectations for ECB to tighten, we would not advise chasing the EUR rally, with near-term upside capped in our view; stay neutral EUR.

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