11 August 2017
Rates & FX Market Update
SGD Held Steady Despite Outperformance in 2Q GDP
¨ Global Markets: Fed’s Dudley reinforced FOMC’s growing doubts on the softening inflationary pressures in US, driving strong gains on the UST curve overnight, skewed towards the long-end of the curve. Robust demand was seen for the 30y UST new issue, garnering a BTC of 2.32x (Jul: 2.31x), with yields on the paper gaining another 4bps to 2.77% post auction. Increased scepticism on US price pressures could prompt FOMC to pause further FFR hikes over the medium term, supporting the rich valuations seen on the longer end of the curve; keep a neutral duration view on USTs. Meanwhile, US Pentagon hinted on the possibility of a pre-emptive attack on North Korea following the exchange of threats, partially cushioning the downward pressure on USD over the past week. We expect the escalating tensions to keep appetite for USD supported vis-à-vis its Asian FX peers, underscoring our neutral view on USD.
¨ AxJ Markets: Benefits from the recovery in regional trade remained evident for Singapore, with the 2Q final GDP print revised higher to 2.9% y-o-y (advanced estimate: 2.5%; 1Q: 2.5%). Movements on SGD and SGS however, remained marginal post data release, as concerns on weak domestic growth continue to bind MAS inclination towards a neutral monetary policy framework, where we opine for MAS to maintain status quo in the upcoming October and April MAS MPS. As such, while further downward pressure on USD may spur USDSGD to decline towards its 1.34 support, we expect the performance on SGD to lag its regional peers, with the SGD NEER currently trending in the upper bound of the MAS policy band; keep a neutral view on SGD.
¨ The USDJPY pair sank lower yesterday to 109.14 (-0.72%) as the incremental dovish shift by FOMC coupled with intensifying geopolitical tensions bolstered appetite for JPY, supporting new lows on the pair, last seen in April this year. Having already deferred achieving its CPI target for the sixth time to FY19, further appreciation on JPY spurred by geopolitical woes surrounding North Korea could further pique BoJ’s concerns on subdued inflationary pressures, fuelling a dovish BoJ rhetoric over the protracted period and undermining strength on JPY over the longer term as the simmering geopolitical tensions eases.
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