28 August 2017
Rates & FX Market Weekly
US Inflation and Jobs Data to Kickstart the End of Summer Lull
¨ A busy economic calendar in the week ahead in the US with inflation data, jobs report, August manufacturing PMI, July personal spending and income and the second GDP growth reading for the second quarter. As softer inflation pressure persists below Fed’s 2% target, Core PCE will be scrutinized and a better than expected reading could reprieve stronger hopes for a third rate hike, a possibility that markets underestimate at this juncture (37.4% hike probability for December based on FFR Futures). Then, the ongoing pernicious political climate in Washington is likely to remain detrimental to the implementation of any fiscal policy strongly further dampening the inflation outlook and increasing the chances of delaying the next interest rate hike. In Europe, unemployment and inflation data are due. Inflation is expected to tick higher in August yet still below the 2% target. We expect an announcement later this fall on an extension and adjustment of ECB’s QE which is likely to take place next year; keep neutral duration view on EGBs. On a currency note, with Brexit talks resuming in the week ahead we continue to expect the EURGBP pair to climb higher eyeing 0.9340 and 0.9460 as next targets.
¨ Over in the UK, expect a relatively quiet week for the early parts, with Gilts and the GBP likely to take cues from global rates/FX movements, as well as month-end positioning flows. The later part of the week sees August consumer confidence and manufacturing PMI due, with the latter likely to influence GBP pair movements on any major surprises in either direction. With GBP NEER again heading towards October 2016 lows, we prefer to maintain a neutral stance at this juncture, although Sterling’s longer-term outlook remains clouded by Brexit negotiation difficulties.
¨ Over in Japan, watch retail sales and industrial production print although at this juncture they are unlikely to switch the sentiment towards the struggling BoJ to ignite positive price pressure with its QQE. As such, we continue to expect the USDJPY to be the proxy to the North Korean situation; watch the next support zone at 108.00 for the USDJPY pair. Lastly in Australia, economic watchers look forward to a plethora of housing data to assess the health of the housing sector, alongside 2Q17 private capex data that is expected to grow 0.2% q-o-q in volume terms. Stabilising iron ore markets are expected to counterbalance RBA’s implicit preference for a weaker AUD, where we expect the AUDUSD pair to linger marginally below the 0.80 handle over the immediate term till the dollar breaks out into a new trading range; stay neutral AUD.
¨ Spotlight on South Korea intensifies in the week ahead with the busy economic calendar coupled with the BoK decision due on Wednesday. Improvements in South Korea economic outlook, buoyed by strengthening 2Q GDP and robust expansions in export growth is likely to be supportive of BoK’s status quo decision in the week ahead. Despite the broadly sanguine economic outlook, scrutiny is likely to remain on South Korea’s declining inventory levels and underwhelming Manufacturing PMI prints, with any expectations towards tightening monetary policies likely to be met with caution. Maintain mild underweight duration view on KTBs over the near term, with risk appetite limited by bouts of heightening geopolitical risk.
¨ China is scheduled to release the official and Caixin Manufacturing PMI data in the week ahead, where the modest expansion is likely to remain supportive towards furthering PBoC’s deleveraging agenda, exerting upward yields on the short end of the CGB curve; keep a neutral duration view on CGBs. The USDCNY pair is expected to consolidate at the 6.66 handle over the coming weeks, with further gains on CNY likely to be limited, as expectations for a decelerating pace of growth within the services sector shifts the onus of growth back towards the traditional Chinese economic engine.
¨ A heavy economic calendar for Thailand in the week ahead, with CPI, trade, Manufacturing PMI and current account data scheduled to be released over the course of the week. We opine the tepid capacity utilisation amidst the improving economic outlook to be unlikely to fuel stronger inflationary pressures, with overall CPI print likely to remain firmly below the 2.5±1.5% BoT target this year, underpinning BoT’s accommodative stance over the medium term. Keep a neutral view on THB over the medium term while lower supply of BoT bills could continue to favour short to mid ThaiGB papers. Meanwhile, we eye Singapore’s loan and advances data on Thursday, with a stronger climb on loan demand likely to indicate the shift away from flushed domestic liquidity, supporting the tight SGS-UST spreads over the coming months, where we reiterate our recommendation to unwind overweight UST vs SGS positions at this juncture.
¨ Over in Malaysia and Indonesia, we expect market movements and trading volume to remain subdued in the absence of any surprises amid a holiday-shortened week. Market directionality remains influenced by global market movements and month-end flows, with both USDMYR and USDIDR likely to remain range-bound over the week ahead.
UST, GILT, Core EGBs, ACGB, SGS, CGB, MGS, IndoGB
USD, GBP, AUD, JPY, MYR, THB, SGD, IDR, CNY