2 August 2017
Rates & FX Market Update
Eye US Treasury Update; Ultra-Long Issuances to Spur Steeper Curve
¨ Global Markets: Moderate gains on USTs were skewed towards the longer end of the curve yesterday ahead of US Treasury funding update due today. Concerns are likely to fixate on (i) plans for increased debt sales following Fed’s balance sheet normalisation, and (ii) issuance of ultra-long maturity following feedback and discussions earlier this year on potential 40y, 50y, or 100y bond sales. We expect the affirmation of ultra-long issuance commencing this year to spur a steeper curve over the medium term at the back-end, even as moderating core PCE underpins scepticism for another FFR hike later this year; we caution against extending long positions on the super-long end. Favourable Manufacturing PMI data was reported for EU, albeit at a softer pace of expansion compared to the prior month (Jul: 56.69; Jun: 56.8), while EU’s 2Q advanced GDP indicated that the bloc grew by 2.1% y-o-y (1Q: 1.9%), exceeding the 2% mark for the first time since 2011. Steady economic activity is likely to bolster optimism towards an increasingly hawkish leaning ECB, fuelling further strength on EUR over the medium term.
¨ AxJ Markets: Indonesia’s Manufacturing PMI sank further into contraction (Jul: 48.6; Jun: 49.5), weighed by declines in both domestic and external demand, clouding the economic outlook of Indonesia. Furthermore, Indonesia’s CPI also moderated towards 3.9% y-o-y (Jun: 4.4%) following the Eid al-Fitr festive holidays, which could remain supportive of BI’s prolonged accommodative monetary policies over the coming quarters to help to bolster domestic growth. Gains on IndoGBs were in line with global markets, where we keep to a neutral duration view, with a preference for belly tenors given its attractive relative value to the curve.
¨ The surprise contraction in Thailand’s Manufacturing PMI could not dampen strength on the THB, which continued to appreciate by 0.05% yesterday to 33.282/USD, emerging as the second strongest currency behind CNY. Boosted by robust fiscal expenditure and recovering demand for exports, Thailand’s sanguine economic outlook continued to draw offshore interest in Thai bond market, underscoring THB’s resilience even as lacklustre price pressure keeps BoT monetary tightening at bay; maintain neutral view on THB, with the USDTHB pair likely to test the 2-year low of 33.0.
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