26 October 2017
Rates & FX Market Update
ECB Expected to Halve Monthly Purchases, Extend QE by 9 Months
¨ Global Markets: 10Y US Treasuries dropped to 2.4735 but pared earlier losses as dip-buyers emerged below the 2.45/2.50% resistance when reported weak corporate earnings dampened the risk sentiment. In the short term horizon, we still expect the Fed's succession race (Powell being the frontrunner) and the future of an uncertain tax reform to drive US markets; remain neutral USD and UST. In the UK, stronger than expected 3Q17 GDP figure (0.4% QoQ vs 0.3% expected and in 2Q17) probably strengthened the case of a rate hike as early as next week (November 2nd), lifting the pound by 1.02% yesterday.
¨ AxJ Markets: Elsewhere, Indonesian lawmakers approved the 2018 state budget proposal, targeting a budget deficit of 2.19% of GDP and 5.4% GDP growth. USDIDR climbed 0.33% overnight, while yields on IndoGBs surged c.10bps, given rising US yields that dampens attractiveness of EM assets. USDIDR is now approaching the 13,600 mark, where we now see the pair averaging 13,500 over 4Q17, with BI likely to remain committed towards macro stability; stay neutral IDR at current levels.
¨ The EURUSD rose ahead of ECB's meeting today when the central bank is expected to announce the future of its monetary policy. While forward guidance and interest rates are likely to be unchanged, the recalibration of the asset purchase program is captivating markets. We join the rather dovish consensus expecting a 9-month extension with purchases halved (EUR30bn/month), with a probable disclaimer "to run until the end of September 2018 or beyond if necessary". That said the reduced amount might also content hawks on the governing council. It should as well prevent from a taper tantrum underscoring our view of a gradual appreciation of the common currency as the end of QE is now in a nearer sight; remain mildly bullish EUR above 1.1680.
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