FW: RHB FIC Rates & FX Market Weekly - 11/9/17

 

 

11 September 2017

 

 

Rates & FX Market Weekly

 

 

USD to Remain Under Pressure Ahead of September FOMC Meeting

 

 

Highlights

 

Global Markets

¨   The economic releases due this week (CPI, PPI and Retail Sales) are likely to be overshadowed by the Hurricane Irma consequences hitting the coast of Florida two weeks after Hurricane Harvey made a landfall in South Texas. The estimations of the damages and likely effects on GDP alongside additional relief package discussions in Washington following the approval of USD15.25bn package for Hurricane Harvey will be under the limelight and likely to create volatility. Additionally, the warlike situation in North Korea is likely to move markets further with downside pressure on the USD to be expected combined with increasing doubts towards the Fed's tightening cycle.

¨   In spite of Mario Draghi raising concerns about the "recent volatility in the exchange rate" which set the tone of a not too hawkish ECB September meeting, the EURUSD closed above the psychological 1.20 level opening the way for further rise towards 1.25 in the short to medium term supported by the ongoing economic recovery, expectations of a QE tapering starting in 2018 and flight-to-quality; keep a mildly bullish EUR view. BoE is expected to take the spotlight in the week ahead post-ECB, although anticipations surrounding the meeting are likely to be relatively calm, given most observers (including us) expect no change to the Bank's policy rate nor its QE operations at this stage. We also expect no significant shift in policy rhetoric, although the split among MPC members remain interesting to observe, with a 5-3 decision likely to embolden hawkish speculators. Key market-moving data due in the week ahead includes CPI and labour data, with both broadly expected to stabilise; stay neutral GBP over the near term.

¨   As the USDJPY convincingly broke below the 108.00 support, further downside pressures for the pair are likely towards the next key support at 106.50 as the unstable situation prevailing in the Korean Peninsula should continue to bolster safe havens as mentioned above. Over in Australia, labour data will be the main highlight, although RBA's focus are likely to be on wage growth instead (not due in the week ahead), having acknowledged the steady strengthening in Australian employment already. RBA remains of the view for stronger labour conditions to eventually translate into wage gains, hence continued data strength should underpin AUD's robustness in the week ahead; stay neutral AUD.

 

AxJ Markets

¨   The sharp breakout seen on CNY over the past week is likely to draw close attention towards China's economic calendar in the week ahead, where investors eye further moderations on aggregate financing amid PBoC's deleveraging reform. Healthy expansions seen on retail sales and IP are unlikely to deter PBoC's plan to further drain liquidity via OMO, which could continue to exacerbate decline seen on the USDCNY pair. Meanwhile, consensus expects China's CPI to inch higher to 1.6% in August, but remains firmly below China's 3% medium term target, which could keep PBoC on hold through the end of the year; keep a neutral duration view on CGBs.

¨   Turning to South Korea, lingering geopolitical tension continued to weigh on sentiment, with 5y CDS rising to its 18-month high as US and South Korea debate upon the appropriate action taken towards North Korea's provocations. We expect weak demand for KRW assets to undermine the magnitude of descend on USDKRW over the near term, preferring to keep a mildly bearish view on KRW. Elsewhere, quiet economic calendar for Singapore and Thailand over the coming week, with Singapore's retail sales likely to provide little new insights to the moderate growth expected for Singapore's domestic economy. While further downward retracements on USD are likely to benefit the Asian currencies, we expect both SGD and THB to increasingly underperform the bloc as SGD NEER limited manoeuvrability at the top bound of the SGD NEER policy band alongside declining tolerance from BoT on THB's strength seek to clip excessive gains on both currencies against regional currencies.

¨   Expect a relatively calm economic calendar in Malaysia with only Industrial Production data due in the week ahead. Expect trading sentiment towards the dollar to remain a key USDMYR factor in the week ahead, with further room for declines if DXY heads towards the 90 handle; stay neutral MYR over the medium term. Lastly in Indonesia, August trade data is expected to remain robust in line with regional fundamentals, although unlikely to act as a strong IDR catalyst in the week ahead; a neutral IDR stance remains appropriate.

  

Weekly Positioning

 

	Rates	FX
Overweight
Mild Overweight		EUR
Neutral	UST, GILT, Core EGBs, ACGB, SGS, CGB, MGS, IndoGB	USD, GBP, AUD, JPY, MYR, THB, SGD, IDR, CNY
Mild Underweight	KTB, ThaiGB	KRW
Underweight	JGB