Rates & FX Market Update
US & North Korea's War of Words Spurred Safe Haven Flows
¨ Global Markets: Safe havens were seen bid overnight amid escalating tensions between the US and North Korea, with UST yields inching c.1-2bps lower while USDJPY dipped below the 110 psychological level. Richer yields weighed on the 10y UST auction overnight, tailing the WI by 1.8bps (HY: 2.25%), with the weakest BTC seen since November 2016 (2.23x) and high take-up by primary dealers. While the Fed's balance sheet tapering plans could pressure rates higher, we think softer inflationary prospects and political/geopolitical volatility should counterbalance the above, limiting the scope of a steeper UST curve over the remainder of 2017; stay neutral USTs.
¨ AxJ Markets: Over in China, both USDCNY and USDCNH broke below the 6.70 level as PBoC gradually strengthened its Yuan fixing over the week, coupled with the bearish USD momentum. July CPI fell to 1.4% y-o-y (consensus and Jun: 1.5%) as non-food price pressures slowed, driven by tightening PBoC policies amid current efforts to slow domestic credit growth. PPI growth remained elevated at 5.5% y-o-y (consensus: 5.6%) on higher steel prices as the property markets picked up. The controlled price momentum should remain supportive of PBoC's deleveraging efforts against the backdrop of steady economic momentum; we maintain our view for a neutral duration stance over the medium term as upward pressure on CGBs yields are likely to remain mitigated ahead of CGB's inclusion into regional bond indices, effective next year.
¨ USDKRW climbed c.0.9% overnight, emerging as the biggest loser among our coverage, on deteriorating EM sentiment and escalating threats between US and North Korea. South Korean CDS spreads widened to a 1-year high of c.61bps as risk premiums rose amid the threats of war, although the implied probability of a conflict remains low. De-escalating tensions will divert investors' attention back onto the economy, as the lagging economic impact from additional fiscal stimulus should maintain BoK's neutral policy stance over the coming months; stay neutral KRW, with near-term key support and resistance at 1,119 and 1,152 respectively.