25 October 2017
Rates & FX Market Update
Weak Australian Inflation Dampens RBA Hike Expectations
¨ Global Markets: 10Y US Treasuries closed above the 2.40% handle for the first time since May as risk sentiment improved as corporates earnings beat, reported news that John Taylor won a show of hands poll of Republican Senators for the next Fed chair and mounting expectations for the enactment of a tax reform. However the budget process is complex and uncertainties remains since at least three Republican senators may not support the tax overhaul and as challenges persist for lawmakers to raise revenues to help pay for cutting taxes; remain neutral USD and UST. Elsewhere, European government bonds fall (10y German Bund +4.4bps) after manufacturing PMI for the Eurozone surpassed estimates (October: 58.6 vs September 58.1 and 57.8 anticipated) ahead of ECB's meeting tomorrow; the common currency consequently registered a positive gain (+0.13%). Going into the meeting, knee-jerk reactions could be expected as there is an inherent difficulty in gauging how markets are pricing the APP parameter changes; watch they key support at 1.1680 for the EURUSD to dictate short term gyrations.
¨ AxJ Markets: Stability in Chinese politics is to be expected over the coming years, after President Xi managed to inject his philosophies into the Communist Party's "guiding principles", becoming the most influential Chinese leader since Mao and Deng. While Chinese watchers will likely eye the new PSC composition later today, we have previously communicated that the outcome is unlikely to have a direct impact on Chinese assets over the near-term. Movements in CNY, CNH and CGBs appear relatively mild overnight, although volatility may rise post-congress as trading activities normalise; stay neutral CNY at this juncture.
¨ AUDUSD dipped c.0.4% overnight and a further c.0.7% this morning post-CPI. 3Q17 headline inflation came in at 1.8% y-o-y (consensus: 2.0%; 2Q17: 1.9%), while average of trimmed mean and weighted median were below expectations as well. Hawkish RBA expectations were likely pared back after the print, with the bank unlikely to turn hawkish at this juncture, in line with our longer-term view for a delay in normalisation of Australian monetary policies. We extend our TP target for our 10y ACGB-UST spread tightening trade idea, and maintain a neutral AUD stance at this stage, with the AUDUSD pair likely to remain below 0.80 for the remainder of 4Q17.
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