8 August 2017
Rates & FX Market Update
July Foreign Reserves Ticked Higher in China, Malaysia and Indonesia
¨ Global Markets: Post-NFP USD strength waned overnight with the DXY declining by 0.12%, after Fed's Bullard expressed his preference for short-term rates to remain at current levels given the constant undershooting of US inflation. Fed's Kashkari warned that the institution's credibility is at stake if it cannot achieve the 2% inflation target, and is one of the most dovish members within the FOMC given his past dissents in March and June. Investors do not currently anticipate a rate hike in September, with markets' attention remaining fixated on the Fed's balance sheet reduction strategy going into the September meeting, with the gradual plan to trim the balance sheet holdings likely to have a marginal impact on markets; we remain neutral UST duration at current levels.
¨ AxJ Markets: Malaysian FX reserves inched higher by USD0.3bn in the second half of July to USD99.4bn, and sufficient to finance 7.9 months of retained imports. July portfolio inflows were bolstered by foreign demand for equities, while investors reduced Malaysian govies' exposure (July: MYR1.5bn) for the 2nd straight month, bringing foreign ownership lower to 26.0% (Jun: 25.4%), as rising hawkish rhetoric among DM central banks and the potential implications on EM liquidity reinforced cautiousness among money managers, despite the strong growth momentum in Malaysia; we stay neutral MGS over the near term. Indonesian FX reserves climbed to an all-time high of USD127.8bn (Jun: USD123.1bn) on foreign inflows, tax payments and global bond sales. Net inflows into Indonesian government securities amounted to USD379m in July, as investors bought the dip in mid-July, with 10y yields gradually trending lower towards the June lows. 2Q17 GDP reinforced Indonesia's stable growth dynamics (5.0% y-o-y; 1Q17: 5.0%; consensus: 5.1%), although the disappointing trend versus government projections so far should push BI to maintain the current conducive monetary conditions and FX regime; a neutral IDR stance remains appropriate at this juncture.
¨ July Chinese reserves ticked higher to USD3.08trn (consensus: 3.07trn; Jun: 3.06trn), as tightening regulatory oversight coupled with the broad weakness on USD helped to shore confidence towards a stabilising CNY. Additionally, improving trade within the region has also remained supportive of China's economic outlook, offsetting expectations for softening property sales over the latter half of the year. Keep a neutral view on CNY, with expectations for the USDCNY pair to consolidate between the 6.70-6.75 range.