21 August 2017
Rates & FX Market Weekly
Marginal New Insights Expected from Jackson Hole Symposium
¨ Top Central Bankers gather for their annual policy summit at the Jackson Hole symposium where discussions "Fostering a Dynamic Global Economy" should focus on the economic-recovery-less-inflation situation and how to fine tune their monetary policies accordingly. While DM economies struggle to apprehend and to boost recent inflation behaviour, the Fed faces high political risks damaging the fiscal and trade outlook. The plan for the balance sheet reduction is likely to be announced in September then to start a month later allowing the FOMC to assess markets reactions; there are increasing chances for the next rate hike to be delayed given weak inflation prospects amid a strained political climate. On another hand, the ECB has now voiced concerns about the risks of a stronger Euro and the markets misinterpretations of its communication. As such, we do not expect Mario Draghi to announce monetary policy tweaks underscoring our view for an APP extended at flexible levels with a careful communication in order to avoid similar dramatic tapering effects to the USD in 2014/2015. As a result, yields are expected to remain anchored with increasing hazards linked to a volatile and temperamental US international policy stance in the context of high geopolitical tensions, the broad USD to remain on a weak footing in the absence of positive catalysts, and the EURUSD to hold above its pullback support at 1.16 with upside potential towards 1.20.
¨ Over in the UK, 2Q17 preliminary print is expected to remain unchanged from the advance estimate, affirming the less optimistic growth momentum. We remain of our view for BoE to stay on the sidelines over the coming months as inflation trends failed to surprise materially on the upside, coupled with lingering uncertainties over the impending Brexit and the hurdle of convincing another 3 BoE members to switch sides; stay neutral Gilts.
¨ Japanese core inflation is expected to print higher (0.5% YoY vs.0.4% in June) insufficient to allow BoJ to even start to discuss QQE adjustments. As global risk lingers, USDJPY keeps downside potential towards 108.00 in the week ahead, a break below 109.25 increasing the conviction for the drop. Lastly in Australia, expect Australian assets to track global market movements on a week with no tier-1 data due. Following fresh ECB concerns on the strengthening currency, and RBA's long-standing stance cautioning against the stronger AUD, we think hawkish speculative flows are likely to be marginally dampened until firm inflationary or labour indicators emerge; stay neutral AUD, with its NEER likely to remain stable or slightly softer over the coming weeks.
¨ Over in Singapore, CPI and IP prints are likely to be overshadowed by developments on the global front, with the global central bankers and leaders speaking at the Jackson Hole symposium. While movements on the USDSGD pair is expected to be heavily influenced by appetite on USD, the proximity of SGD NEER to the upper bound of the MAS policy band underscores our caution on extending long positions on SGD vs regional peers, preferring to keep a neutral view on SGD at this juncture given a high likelihood of MAS status quo decision in the next 2 MAS MPS. Spreads between SGS and USTs have also tightened to its 2-month low, where we see value in unwinding our previous recommendation to overweight USTs vs SGS.
¨ In Thailand, we opine for strong custom trade data and healthy 2Q GDP expansion to bolster the allure for THB assets, and favouring a strengthening THB. While BoT has expressed concerns on the pace of appreciation on THB, likelihood for BoT to intervene on the stronger side of THB remains low given US Treasury's tight scrutiny on Asian currencies, with expectations for BoT to encourage domestic capital outflows, in line with its Capital Account Liberalisation Master Plan. Maintain a neutral view on THB, while keeping a short duration tilt on ThaiGBs as BoT's plan to reduce bills and short term bonds could continue to favour short dated ThaiGBs over the near term.
¨ Elsewhere, no key economic data is expected for China and South Korea asboth countries navigates through its geopolitical tensions surrounding North Korea and India. Geopolitical risk for South Korea could limit strength on KRW, particularly as the US-South Korea military drills in the region does little to alleviate the tensions, underscoring our mildly bearish view on KRW; expect KTB to take directional cues from USTs. Meanwhile, clear resolve for PBoC to further its deleveraging efforts are likely to keep yields on CGB yields elevated at current levels over the medium term while we expect the USDCNY pair to begin consolidating after a strong breakdown below the 6.70 handle.
¨ Over in Malaysia, investors are expected to keep an eye on mid-August foreign reserve levels as the country struggles with risk-off flows. July inflation due is expected to show moderating price pressures, offering BNM room to keep the status quo over the coming months and maintaining the upswing in growth momentum seen from the 2Q17 GDP print; stay neutral MGS. Lastly, Bank Indonesia reconvenes on 22 August, where we remain of the view for the bank to maintain the monetary status quo, given little threat of higher inflationary pressures amid an increasingly uncertain economic backdrop. Indonesian assets have continued to exhibit low volatility despite its high-beta EM label, although we eye increasing vulnerability on geopolitical tail events and rapidly-shifting global narratives; stay neutral IDR.
UST, GILT, Core EGBs, ACGB, SGS, CGB, MGS, IndoGB
USD, GBP, EUR AUD, JPY, MYR, THB, SGD, IDR, CNY,
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