FW: RHB FIC Rates & FX Market Update - 8/9/17

 

8 September 2017

 

 

Rates & FX Market Update

 

 

ECB Offered Little Against Lofty Expectations

 

Highlights

 

¨   Global Markets: ECB failed to meet markets' hawkish build-up expectations, keeping its key policies unchanged and offered no new guidance towards the bank's QE program. While the bank upgraded 2017's growth forecasts to 2.2% (previous: 1.9%), it also downgraded inflation projections for 2018 and 2019 to 1.2% and 1.5% respectively (previous: 1.3%, 1.6%), below its 2% target. 2y and 10y EGB yields fell c.2-11bps overnight on the news, although EURUSD bucked yield movements to finish 0.8% higher overnight, even as ECB's Draghi warned that EUR volatility remains a source of uncertainty and the currency's strength negative impact on inflation; stay mildly bullish EUR over the near term. Despite an ECB meeting that is not widely seen as hawkish, DXY fell 0.68% overnight on a plethora of factors, including: i) poor initial claims data; ii) growing Republican opposition to President Trump's deal with Democrats, potentially threatening and de-railing his economic agendas; and iii) President Trump's suggestion to scrap the debt ceiling, weighing on US's longer-term fiscal fundamentals. While we recommend a neutral USD stance over the near term, heightening risks of delays in rate hikes and an unproductive political climate could continue to weigh on the dollar's attractiveness over the medium term.

¨   AxJ Markets: The softer USD movements aided the decline in USDMYR below the 4.20 handle this morning even as  BNM delivered no headline surprises by leaving the OPR unchanged at 3%, pointing towards the strong growth momentum en over the year and contained inflation. We continue to eye gradual MYR gains against the USD over the coming quarters, supported by a strong Malaysian outlook and our cautious USD view over the medium term.

¨   USDJPY fell 0.74% overnight to the 108 handle, mainly on the weaker USD backdrop. 2Q17 final GDP data due this morning revealed that growth slowed to 2.5% q-o-q SAAR (consensus: 2.9%; previous: 4.0%), driven by weaker-than-expected business spending. With y-o-y inflation remaining close to flat, we see little chance for BoJ to join ECB in normalising policy rates over the coming months, although the bank continues to face issues in maintaining their massive QE operations given the dwindling liquidity; stay neutral JPY.

 

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