4 August 2017
Rates & FX Market Update
BoE’s Pessimism on Economic Outlook Weighed on GBP
¨ Global Markets: GBP sank by 0.67% to 1.3138 against the USD yesterday as BoE’s Carney highlighted concerns of UK’s economic outlook during the Brexit transitory period following BoE’s MPC decision to hold the Bank Rate at its all-time low of 0.25% in a 6-2 vote, in line with the previous voting pattern. Furthermore, BoE reduced its forecast for GDP and wage growth further, with 2017 and 2018 GDP forecasted to expand by 1.7% and 1.6% respectively (previous: 1.9% and 1.7%) reflecting weaker consumer and business spending. Yields on GILTs declined by 7-9bps, where we expect the softening domestic sentiment alongside Brexit uncertainties to keep BoE’s inclination for a monetary tightening at bay; maintain neutral duration view on GILTs. Decline in DXY was mitigated by weakness in GBP, while yields on USTs fell lower by 2-6bps, following the release of dismal ISM Non-Manufacturing data which eased to 53.9 (Jul: 57.4), fuelling further scepticism in the market for another FFR hike this year; movements were further compounded by a report that special counsel Mueller has impanelled a grand jury. Yields on 10y UST edged lower to 2.23%, where further disappointments from US NFP released later today could spur the 10y to retest its 2.10% support over the coming week; maintain neutral duration view on USTs.
¨ AxJ Markets: China’s moderating expansion indicated by the Caixin Services PMI echoed the official Non-Manufacturing PMI survey, suggesting that economic growth could begin to ease after posting a strong start this year, dampened by increasing regulatory oversight on the property sector. Despite so, the robust growth registered in 1H17 is likely to cushion the softer growth outlook, bolstering PBoC’s resolve to enforce further deleveraging ahead of the CPC National Congress in October; Movements on CGBs remained muted overnight despite huge gains in the global and regional bond markets.
¨ USDJPY held above the 110 handle, as PM Abe’s Cabinet reshuffle to include experienced politicians in a bid to stem further declines in his approval rating and bolster confidence towards his result-oriented Cabinet. Ahead of US NFP due later this evening, expectations remain biased towards a softening trend, which could further support the downward trend in the USDJPY pair to retest its recent 8-month low of 108.13 registered in April; expect appetite for USD to remain the key catalyst for the currency pair.
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