The 19th round of discussions for the Regional Comprehensive Economic Partnership (RCEP) held in India, beginning on 24th July, with negotiations likely to be centered on eliminating duties on traded goods. Although the RCEP negotiations are not expected to conclude this year, stalled TPP negotiations following US’s withdrawal has placed great e

24 July 2017

Rates & FX Market Weekly

Hints from FOMC Statement to Set Tone for FX Market

Highlights

Global Markets

¨   The FOMC decision will be the highlight of a busy economic week. While the Committee is anticipated to stay on hold, investors will try to decipher its statement for hints on the US inflation outlook and on a timing for the balance sheet reduction; at this juncture a December rate hike is an unlikely event priced by markets in line with our view for further rate hikes delay. That said, the US economy is expected to have accelerated in 2Q17 against the backdrop of improving consumption. Strong improving prints could boost sentiment while the ongoing US political turmoil and the increasing risk of a tax overhaul failure remains a drag to the USD underscoring our neutral stance.

¨   In Europe, July preliminary PMIs are expected to come in line with June prints underscoring a resilient start for 3Q17. French and German CPI will be scrutinized in the wake of Draghi’s comments about a gradual inflation recovery expected in the medium term. The dovish ECB message is likely to support EGBs yet we keep a neutral view as long as 10y German Bund hold above 0.50% while a lack of support to the tightening rhetoric, at this juncture, is unlikely to push the EURUSD above our next resistance at 1.1700 in the short term.

¨   In the UK, 2Q17 advance GDP print will be due ahead of the BoE meeting, with growth likely to come in at 1.7% y-o-y (1Q17: 2.0%) amid pressure on real wage growth negatively impacting consumer spending. A strong print may setup for an interesting BoE meeting amid the summer lull; stay neutral GBP.

¨   Japan will release inflation, unemployment and retail sales for June and preliminary manufacturing data for July providing an economic snapshot. Headline and core inflation are expected to be unchanged (0.4% YoY) still a long way to BoJ’s 2% target confirming BoJ’s decision to cut its inflation forecasts at its July meeting. While monetary policy discrepancy are likely to contain downside pressure on the USDJPY pair, US political risks continue to support the JPY underscoring our neutral JPY view.

¨   Lastly, 2Q17 Australian CPI could be the most important data point to watch in a while, after recent upbeat RBA minutes that continued to fuel speculations of an impending policy tightening. Robust headline and core prints may push the AUDUSD pair to test the 0.80 level for the first time since 2015, although the RBA is likely to refrain from rash actions that may dampen the current economic momentum, given the side effect of a stronger AUD; stay neutral AUD over the near term as long as the AUDUSD holds below 0.80.

AxJ Markets

¨   The 19^th round of discussions for the Regional Comprehensive Economic Partnership (RCEP) held in India, beginning on 24^th July, with negotiations likely to be centered on eliminating duties on traded goods. Although the RCEP negotiations are not expected to conclude this year, stalled TPP negotiations following US’s withdrawal has placed great emphasis on the RCEP, which accounts for 40% of world trade. Separately, we see a quiet economic calendar in China, where the strong economic growth outlook is likely to remain supportive towards PBoC’s prudent monetary policy stance and deleveraging efforts, limiting downside pressure on CGBs over the coming weeks.

¨   Turning to South Korea, 2Q preliminary GDP data is widely expected to print at 2.7%, softer than the 2.9% seen for 1Q which could raise skepticism over BoK’s recent FY2017 GDP forecast revision to 2.8%; parliamentary vote on KRW11.2trn fiscal stimulus to be delayed to 2^nd August. Despite so, major driver on movements of KTBs and KRW in the week ahead is expected be driven by appetite for USD post FOMC, where any hints of dovish revert could spur the USDKRW to test the 1090 support; keep a neutral duration view on KTBs.

¨   Meanwhile, key data out of Singapore in the week ahead include CPI, IP, and unemployment rate, with June’s CPI print expected to moderate back below the 1.0% handle, posing little incentives for MAS to shift out of the current monetary policy framework later this year; further softening on USD could send the USDSGD pair to test its 11-month low of 1.34 in the medium term should the pair convincingly break below 1.36. The Singapore government will also reopen the 7y non-benchmark SGS 2.375 06/25, with a smaller than expected issuance size of SGD1.3bn. Demand for the reopening is expected to be mediocre given the flattish SGS yield curve alongside increasing global inclination for global policy normalization.

¨   Elsewhere, Thailand is set to release data on manufacturing production and capacity utilisation in the week ahead. Despite the steady recovery in economic outlook, partially buoyed by exports, the weak capacity utilisation in Thailand suggests the prospect for subdued inflation to persist over the medium term, underscoring expectations for a prolonged accommodative stance from BoT; expect yields on short to mid ThaiGB yields to remain anchored.

¨   Amid a quiet calendar week in Malaysia and Indonesia, expect the usual month-end rebalancing flows to drive market movements; despite a week with a scheduled FOMC meeting, it is unlikely to deliver any material surprises. We do expect a moderate reaction in EMs, including Malaysia and Indonesia, if the Fed does surprise on the hawkish end.

  

Weekly Positioning

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

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