US & UK: Rising hawkish rhetoric among DM central banks weighed on the USD. The dollar had its worst monthly performance year-to-date (-2.89% m-o-m) on diminishing hawkish FOMC expectations, while other major central banks appeared to shift up their tightening rhetoric. The Fed have somewhat acknowledged the softening inflation outlook as prints continued to disappoint, while the US reflation hope is practically dead given that the DXY remained below pre-election levels, as Washington’s political paralysis appears set to linger on. Over in the UK, GBPUSD closed firmly above the

3 August 2017

Rates & FX Markets Monthly Review

USD Heading towards 2016 Lows as ECB Mulled Policy Normalisation

Highlights

¨   US & UK: Rising hawkish rhetoric among DM central banks weighed on the USD. The dollar had its worst monthly performance year-to-date (-2.89% m-o-m) on diminishing hawkish FOMC expectations, while other major central banks appeared to shift up their tightening rhetoric. The Fed have somewhat acknowledged the softening inflation outlook as prints continued to disappoint, while the US reflation hope is practically dead given that the DXY remained below pre-election levels, as Washington’s political paralysis appears set to linger on. Over in the UK, GBPUSD closed firmly above the 1.30 psychological at month-end, broadly driven by the on-going selloff in the Dollar. While labour data came in firm, weak GDP and CPI prints alongside Brexit negotiation difficulties continue to cloud UK’s economic outlook; a continued split within BoE’s MPC to sow confusion among UK watchers.

¨   Eurozone: “Policy tightening” theme drove European market movements. European curves steepened m-o-m on hawkish bets following ECB’s Draghi speech in Sintra, although these movements were later retraced after the July meeting was broadly viewed as dovish. EUR gained 3.64% against the USD m-o-m, with net long speculative positions climbing more than 50% in July to 93k contracts, as investors sold dollars against most other major currencies. While most within the governing council broadly supported the winding-down of monetary stimulus, there appears to be no firm consensus on the timeline and exact measures to do so.

¨   Japan & Australia: BoJ stick to its QQE with inflation remaining far below the 2% target. Contrasting from its global peers, BoJ affirmed its commitment towards QQE as lacklustre price pressures spurred the Bank retain its accommodative stance and to postpone the timing of achieving its 2% CPI target by another fiscal year to FY19. Despite so, JPY logged strong gains of 1.90% m-o-m to 110.26/USD as the USD retreated, while yields on 10y JGB held religiously between the 0.0-0.1% trading range over the course of the month, undeterred by volatility seen within the global bond markets Lastly, intense speculations over any near-term RBA tightening were quashed by Governor Lowe; the bank also largely kept its previous rhetoric in its statement and minutes despite rising appetite to tighten policies elsewhere. While data suggested robust labour markets, 2Q17 headline inflation disappointed on the downside, although this appears insufficient to reverse m-o-m upticks in ACGB yields. AUDUSD had one of its best months (+4.08%), underpinned by stabilising iron ore prices and sentiment towards China.

¨   Developed AxJ: Strong KRW appreciation buoyed by strengthening economic growth outlook; prospect for further BoK easing faded. Muted movements were seen on SGS curve m-o-m, with spreads between SGS and UST making a new 3-year high at 26bps; demand for the 7-year non-benchmark SGS was average. Underperforming 1H17 GDP growth continues to constrain expectations for MAS to signal tightening in its upcoming October MPS, dampening SGD’s strength vis-à-vis its developed AxJ peers; USDSGD’s convincing break below the 1.36 barrier was largely attributed to softening USD appetite. Meanwhile, investors remained unfazed by South Korea’s President Moon uphill challenge in appointing members of his Cabinet coupled with North Korea’s increasing aggression, with KRW recording the strongest performance within the Asian bloc, appreciating by 2.17% m-o-m to 1,119/USD. Yields on KTBs inched higher m-o-m as diminished prospect of further BoK easing was cemented by the approval of President Moon’s fiscal stimulus, spurring an upward revision for the country’s 2017 GDP forecast by BoK.

¨   Emerging AxJ: AxJ EM central banks held monetary policies over the month of July. Stability on the CNH overnight rates in July support tenacious gains on CNH CGBs, with yields on CNH CGBs declining by 23-33bps across the curve. Separately, USDCNY and USDCNH gained on the back of weakening USD movements, with USDCNY breaking the 6.80 support convincingly and trending lower to 6.7266 at the end of the month as the steady economic growth outlook aided in mitigating net capital outflow pressures. Meanwhile, strong offshore interest in ThaiGBs spurred strong gains on THB along with the short to middle portion of the ThaiGB curve m-o-m, as climbing demand for Thai exports and strong fiscal expenditure underscored the sanguine economic outlook in Thailand. Yields on 2y ThaiGB fell by another 5bps to 2.43%, retesting the 7-month low sustained in late June, anchored by expectations of a neutral BoT monetary policy stance going into the 4Q18 General Elections. In Malaysia, 10y MGS yields surged c.7bps m-o-m on softening EM sentiment given tightening global liquidity and geopolitical volatility; 3y MGS yields fell c.3bps m-o-m after BNM kept its policy and rhetoric unchanged amid tamed inflation. BNM governor Muhammad also argued that Malaysia’s FX reserve levels were sufficient, with the nation’s re-accumulating its reserves since April, and currently comfortably above the recommended minimum 3 months of imports. 3y and 10y IndoGB yields climbed c.9-13bps m-o-m after the government revised its 2017 budget deficit forecast upwards to 2.92% of GDP (previous: 2.41%), although the Finance Minister said that the actual deficit will likely come in lower (projected: 2.67%) due to unrealised spending. BI held its policy rate at 4.75% as expected, and remained optimistic for 2017 growth to exceed that of 2016. USDIDR was relatively unchanged despite the dollar’s weakness, although realised volatility stayed at subdued levels (1m: c.2.3%).

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