18 August 2017
Rates & FX Market Update
Another Setback for Trump Administration Drove 10y UST Below 2.20%
¨ Global Markets: The Trump administration was dealt with another setback yesterday following rumours that Chief Economic Advisor Gary Cohn plans to resign, potentially undermining the President's tax and business reform initiatives made during campaign. The weak sentiment arising from geopolitical risk, domestic protests, and fiscal inaction could further dampen the likelihood of another FFR hike later this year, buttressing further downward pressure on UST yields, with 10y breaking below the 2.20% handle yesterday. We see little value in chasing the UST rally at this juncture, preferring to keep our neutral duration view on USTs ahead of US special elections in November. Meanwhile, lower than expected jobless claims failed to buoy strength on the USD yesterday, with USDJPY diving lower to 109.42 (-0.63%), where we expect the challenging fiscal climate coupled with increasing diversion from geopolitical and political woes to spur weak appetite for USD at this juncture.
¨ AxJ Markets: In a press conference marking his first 100 days in office, President Moon asserted that North Korea's launch of an intercontinental ballistic missile with a nuclear warhead would constitute to crossing the red line. While US has agreed to consulting South Korean leaders before acting against North Korea, regular military drills conducted by US and South Korea could do little to alleviate geopolitical tensions, fuelling our cautious view on KRW assets at this juncture. Gains on KTBs remained marginal vs USTs yesterday, where we expect the lingering geopolitical risk to clip duration appetite for KTBs; maintain mild underweight duration view on KTBs.
¨ In spite of the softer appetite for USD yesterday, EUR depreciated moderately to 1.1726/USD (-0.39%) post ECB minutes released which emphasized the ECB members' concerns on the risk of EUR overshooting higher over the medium term, which could undermine ECB's efforts to promote price stability. Additionally, discussions on monetary policy normalisation indicated ECB's preference for flexibility with careful communication against the backdrop of moderating inflationary pressures and possible markets misinterpretations, underscoring our expectations for ECB to defer decisions for policy normalisation until the asset purchase plan concludes at the end of the year. We reiterate our mildly bullish view on EUR over the medium to long term, with expectations for the pair to challenge the 1.20 resistance over the 6-9 months horizon; ECB's Draghi speech at Jackson Hole likely to reaffirm ECB's less hawkish rhetoric.
This message is intended only for the use of the person(s) to whom it is
addressed and may contain information that is privileged or otherwise protected
from disclosure. If you are not the intended recipient you are hereby notified that
any use, review, disclosure or copying of this message and the information it
contains is prohibited. If you receive the message in error, please notify the
sender by reply e-mail and discard all its contents.