FW: RHB FIC Rates & FX Market Update - 15/8/17

 

15 August 2017

 

 

Rates & FX Market Update

 

 

Reprieve on KRW Likely to be Short Lived amid Geopolitical Risks

 

Highlights

 

¨   Global Markets: Yields on 10y UST held cautiously above the 2.20% support yesterday, as Charlottesville protests continued to weighed on domestic sentiment. Ahead of the heavy economic calendar later this week, we expect FOMC minutes to emphasize the Bank's concerns on weakening price pressures, overshadowing the upcoming data prints, expected to be stronger, hence keeping yields on USTs anchored over the near term; keep a neutral duration view on USTs. Meanwhile, geopolitical tensions surrounding North Korea is expected to be the strongest catalyst on USD over the coming weeks, with lingering bouts of risk aversion likely to favour the broad USD index against AxJ currencies. Upward momentum on EURUSD eased further following the softer than expected EU IP, which edged higher by 2.6% y-o-y (consensus: 2.8%; May: 3.9%). With ECB beginning to signal the prospect of monetary tightening over the medium term, investors are likely to keep a close eye on EU's preliminary 2Q GDP print tomorrow, with a strengthening trend likely to bolster risk sentiment within the EU region, favouring gains on peripheral EGBs over its core counterparts; keep a neutral duration view on EGBs.

¨   AxJ Markets: Movements on CGBs and CNY were relatively modest yesterday despite the disappointing retail sales and IP print, overshadowed by the overarching geopolitical tensions alongside PBoC's new guideline on including the Negotiable Certificates of Deposit (NCD) to in its assessment of banks' interbank liabilities. The inclusion remains in line with PBoC's efforts to promote deleveraging, which could drive interbank rates higher, supporting the tight 2/10y CGB spreads over the near to medium term.

¨   Ahead of South Korea's Liberation Day, a modest rebound on KRW was seen yesterday, bringing the USDKRW pair lower by 0.34% to 1,140 as US national security officials dampened fears of an imminent nuclear war with North Korea. However, we expect geopolitical risks to remain amplified over the course of August, given North Korea's assertion to launch four missiles towards Guam in mid-August, alongside US and South Korea's plan to hold joint military exercises at the end of the month. As such, we are likely to see the reprieve on KRW to be short-lived, preferring to shift towards a mildly bearish view on KRW over the medium term.

 

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