RBA, BoE Policy Decisions to Watch Before Jackson Hole

31 July 2017

Rates & FX Market Weekly

RBA, BoE Policy Decisions to Watch Before Jackson Hole

Highlights

Global Markets

¨   A busy week on the US economic calendar with the labour report as the highlight to conclude the week: while NFP are expected to be steady (180K) and unemployment rate to fall to a 16-year low (4.3%), wage growth remains key in view of inflation and is anticipated to have soften to 2.4%. Other data include June Core PCE, Personal Income and Spending, ISM Manufacturing. With the US Congress going into summer recess, the USD could take a breather (impending weekly Doji candlestick at the support area 93.90/94.00) although the potential for a rebound appears limited in amplitude given low inflationary pressure not supportive of additional rate hike; remain neutral USD.

¨   In the UK, while PMI prints are due that should drive movements on the GBP, the main event for the week is likely to be BoE’s policy decision, the last major central bank meeting before the summer lull takes over. We expect a status quo decision along with the possibility of a slight downgrade in inflation projections. Dissenters alongside Tenreyro’s policy stance will be closely watched by global investors as well; an unchanged number of dissenters (3 from the last MPC) are to continue fueling hawkish bets and a sense of policy uncertainty amid a split within the MPC. We see a neutral GBP stance remaining appropriate given our views and the current backdrop. In Europe, aggregate GDP growth for the second quarter is expected to have advanced to 2.1% YoY (1.9% in 1Q17), unemployment rate to have fallen to 9.2% in June (9.3% in May) but CPI prints are likely to underscore Mario Draghi’s required patience in order to return close to the 2% level. We still watch the inflection levels for the EURUSD testing the key resistance at 1.17 and 10y Bund holding just above 0.50% before validating the next midterm move; remain neutral EUR and EGBs.

¨   In Japan, Industrial Production and Services PMI are due amid a light economic calendar. AS US and Europe enter the summer lull, expect mild movements on the USDJPY stabilizing above the 110 handle barring any unforeseen geopolitical tensions. Elsewhere, expect an extremely busy economic calendar in Australia, including several key indicators including Trade data and Retail Sales. RBA also reconvenes on August 1, with the bank unlikely to deliver any surprises given the clear stance recently adopted by Governor Lowe against any immediate needs for policy tightening; maintain neutral ACGB duration view in line with our UST view.

AxJ Markets

¨   China kickstarts the week with a string of Chinese PMI data where consensus expects both official and Caixin data to remain above the 50 mark, bolstering sentiments towards a strong start to 2H17. Consolidative movements on USD likely to ease downward pressure on the USDCNY pair over the coming weeks, where we expect the pair to gradually grind higher towards the 6.80 resistance. Additionally, supportive economic data are also likely to affirm PBoC’s resolve for deleveraging, keeping yields on short dated CGBs elevated at current levels over the medium term. Over in Singapore, little surprises are expected from the PMI prints due in the week ahead, with SGS likely to continue taking directional cues from USTs while the negative UST-SGS spreads remain fueled by ample liquidity; maintain neutral duration view on SGS.

¨   Turning to South Korea, we see major economic data scheduled to be released in the week ahead, including CPI, PMI, and export prints. While the headline CPI has climbed towards BoK’s medium term target, the subdued domestic price pressures coupled with the weak labour market are unlikely to sway any BoK tightening policies at this juncture, anchoring yields on the short end of the KTB curve. Meanwhile, strong exports and trade surpluses are likely to remain supportive of KRW, keeping the pair near the 1,110 low as DXY begins to consolidate.

¨   Elsewhere, Thailand bounces back with a heavy economic calendar which includes CPI, trade, and consumer confidence. Thai CPI is expected to shift into the positive territory for the month of July, but unlikely to register much upside surprise given tepid capacity utilization alongside domestic spending. We keep a close eye on consumer confidence, as the high household debt and the persistently weak consumer confidence are likely to limit the prospect of a strong consumption recovery, keeping the Thai government and BoT primed towards accommodative policies over the protracted period. Expect USD to remain the largest driver behind the USDTHB pair in the week ahead, while yields on short to mid dated ThaiGBs are likely to remain anchored over the near term.

¨   Over in Malaysia, even another sub-50 PMI print is unlikely to attract much attention given the on-going underperformance in the indicator. Trade data due at the end of the week will be closely watched, with another strong double-digit growth likely to cement a strong 1H17 for Malaysia, although there could be seasonal distortions due to the Ramadan holidays; we continue to maintain our neutral MYR stance. Lastly, Indonesia July CPI is likely to slow down further after the holidays, and we expect BI to retain its neutral policy stance on no immediate inflationary concerns. 2Q17 GDP print is likely to stay above 5%, although the overall pace remains mildly disappointing relative to the government’s initial FY2017 projections; stay neutral IDR.

  

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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