29 August 2017
Rates & FX Market Update
Renewed North Korea Uncertainty Spurred Demand for Haven Assets
¨ Global Markets: Overnight US economic data remained soft, with wholesale inventories ticking 0.4% higher m-o-m (consensus: 0.3%) alongside a wider trade deficit (65.1bn; consensus: 64.5bn). UST auction metrics were mixed, with weak demand for the 2y issuance mitigated by a strong 5y offering; we reiterate our neutral UST duration view over the next 4 quarters given the Fed's reluctance to accelerate its FFR trajectory. Amid a relatively quiet European session given the UK Bank holiday, EURUSD continued its upward climb towards the 1.20 level (1.1978; 0.31% higher overnight) as investors continue to extend EUR longs, eyeing an eventual monetary policy normalisation by the ECB over the coming year; upward momentum on the EURUSD pair was also supported by deteriorating USD sentiment as investors price in US political dysfunctionality, a far cry from hopes of corporate reforms and tax overhauls a few months ago. We remain mildly bullish towards the EUR over the near term, eyeing a potential break above 1.20.
¨ AxJ Markets: Both USDCNY and USDCNH dipped c.0.5% and c.0.3% overnight respectively, underpinned by USD weakness and stronger PBoC Yuan fixings. The on-going dollar weakness may offer a reprieve towards CNY and capital flow stability ahead of the Chinese leadership transition in 4Q17, allowing PBoC to continue advancing its deleveraging goals; stay neutral CNY.
¨ USDJPY dipped c.0.5% overnight to c.108.7 following news of another North Korean missile launch across Japanese territory, prompting investors to seek safety in haven assets. With BoJ unlikely to shift its headline monetary policies (yield control and QQE) over the coming months, movements in the Yen is likely to be dictated by global risk sentiment and USD/EUR news flow, with a break below 108.1 over the coming week likely to send the pair to test the strong support around 106.50; stay neutral JPY.