Friday, August 4, 2017

We continue to believe in buying momentum of short-ends to sustain in Aug as domestic fundamentals are supportive. The Baht may appreciate further to key level USD/THB 33.125 with surplus in current account increased more than anticipated in Jun and headline CPI in Jul decreased to 0.13% from prior month or stayed subdued at 0.17% yoy in Jul, below the estimate of 0.3% and 1.0-4.0% BoT’s target band. Meanwhile, supply risk is intact as LB supply is relatively heavy in Aug and mostl

Attached is the monthly market commentary for Jul 2017. We have included the near term outlook for the month of Aug 2017.
  • Fed maintained rates in Jul FOMC as expected. However, policymakers remained concerned by inflation. At the same time, we also note the less-than-hawkish comments by ECB’s Draghi. In addition to the weak-to-mixed economic data, we reckon UST yields are likely to be capped in the short term period, pending stronger economic data and hawkish remarks from Fed officials. The key event to watch out in Aug will be Fed symposium in Jackson Hole scheduled on 24-26 Aug, ahead of the Sep FOMC meeting.
  • Last month Bank Negara maintained OPR at 3.00% as widely expected, while its stance remains accommodative, amid expectation of upbeat growth and contained inflationary outlook for 2017. On the other hand, the central bank pointed the Ringgit has been stable alongside the more balanced demand and supply of foreign currencies. The MPC meeting outcome was in line with our expectation, and we continue to see the central bank staying pat on rates going forward until end-2017.
  • We continue to believe in buying momentum of short-ends to sustain in Aug as domestic fundamentals are supportive. The Baht may appreciate further to key level USD/THB 33.125 with surplus in current account increased more than anticipated in Jun and headline CPI in Jul decreased to 0.13% from prior month or stayed subdued at 0.17% yoy in Jul, below the estimate of 0.3% and 1.0-4.0% BoT’s target band. Meanwhile, supply risk is intact as LB supply is relatively heavy in Aug and mostly concentrated at the long-end (including 30-year LB466A on 9 Aug, 10-year LB26DA on 16 Aug, and 50-year LB666A on 30 Aug). Furthermore, the remaining mid-end bond offering was the new 5-year benchmark LB22DA on 2 Aug. In addition to LB supply, market position to hedge long-term offshore loans from local clients and government agencies is likely to shift THBIRS curve higher, and thus increasing pressure on the bond curve. Therefore, we expect 2x10 spread to widen to our target 105bps from current level 101bps.  
  • Rupiah is supported by improving current account balance, low inflation, improving commodity price and rating upgrade by S&P. However, indications of monetary tightening amongst major central banks could weaken the Rupiah temporarily. CIMB Niaga forecasts USD/IDR to average 13500 in 3Q2017.

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