FW: RHB FIC Rates & FX Market Weekly - 22/1/18

 

 

 

22 January 2018

 

 

Rates & FX Market Weekly

 

 

A Week of Confirmation for Hawks

 

Highlights

 

Global Markets

¨   The US Government is effectively in shutdown and while symbolic as it happened on Trump's one year anniversary and for the first time in history with employees unpaid when one party controls the House, Senate and White House, we believe that economic and market consequences will be mild. Much will depend on how long the shutdown lasts and on the underlying factors at play. In that sense, 4Q17 GDP growth will be watched and is expected to have softened to 2.9% vs 3.2% in 3Q17. Consequently, January PMI will set the tone for 1Q18. Then, Nafta's fate is discussed with an unclear outcome given Trump's threats to pull out amid renewed fears of a Trump-China trade clash. We remain mildly bearish USD while any yield surge close to 2.75% (10y UST) might be sought as tactical opportunity.

¨   In Europe, political risk continued to recede on German politics progress. While interest rates and APP are expected to remain unchanged as ECB reconvenes, communication will be scrutinised with market participants dissecting Draghi's speech for any hints of future monetary policy. Hawkish expectations mounted after the December minutes against the backdrop of a strong performing EA economy, hence any confirmation/disappointment will drive EUR gyrations. UK PM May's flagship Brexit bill will face scrutiny in the (largely pro-EU) House of Lords, where the Conservative Party do not have a majority, after being cleared in the Lower House. Political uncertainties could weigh on the currency at the time the GBPUSD pair nears the 1.40 resistance; remain neutral GBP.

¨   Bank of Japan reconvenes and releases its quarterly growth and inflation outlook. The Bank might communicate/decide to lift up its yield target to alleviate pressure on bank margins, lining up with hawkish expectations. We keep a neutral view JPY for the moment given the slow path of price appreciation (Dec. core CPI expected to remain stable at 0.9%) with Kuroda likely to remain prudent. In Australia, ACGBs and the AUD will likely take cues from global trading sentiment in the week ahead with no key economic indicators due. While the labour market continues to exhibit strength, any cash rate hikes by the RBA will likely have to be accompanied by credible signs of rising inflationary pressures. While AUD appears to have additional room for further upsides over the near term, we retain our neutral stance over the medium term, especially if RBA fails to deliver investors' lofty expectations.

 

AxJ Markets

¨   After a stellar Year 2017 as China expanded 6.9% y-o-y, authorities remain committed towards maintaining growth without compromising on economic fundamentals, where we continue to see tightening measures throughout 1H18. In the week ahead, China December industrial profits will likely garner some attention as the measure eked double-digit growth over the year, although Chinese assets could remain influenced by the beat in GDP and retail sales due in the preceding week; expect CGBs to continue trading on a soft footing over 1H18.

¨   Over in Singapore, December inflation data due in the week ahead will likely be scrutinized for any signs of pickup in price pressures. Industrial production due in the week ahead will likely impact short-term SGD movements as well, although US developments will likely play a significant role in the region's trading sentiment; a neutral SGD stance remains appropriate. In Thailand, while December trade data is expected to expand at double-digit pace, renewed scrutiny by authorities are likely to set a more cautious trading tone in the week ahead, where we eye the next USDTHB support at around 31.65.

¨   Expect an interesting week ahead in Malaysia, where foreign reserves are expected to surge in the first half of January, anchoring favourable expectations among Malaysia investors. Headline inflation due is expected to tick higher to 3.50% y-o-y in December. Last but not least, all eyes on BNM's MPC this week with the rhetoric of the policy statement closely watched by bond and macro investors. Prospects of OPR hike in 2018 remains on the cards amid sustained growth prospects; stay mildly constructive towards the MYR. With no economic data due in Indonesia in the week ahead, expect regional and global sentiment to influence Indonesian asset movements.

  

Weekly Positioning

 

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

 

 

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