FW: RHB FIC Rates & FX Market Update - 20/3/18

 

 

 

20 March 2018

 

 

Rates & FX Market Update

 

 

GBP Surged on Brexit Optimism, But Unlikely to Hold

 

Highlights

 

¨   Global Markets: FX markets are somewhat comfortable in their trading ranges prior to FOMC and the much awaited release of the dot plot (G3 FX Tactical View; 16 March 2018) while conflicting factors are at play. First, G20 officials warned about the risk of a potential trade war as the Trump administration is luring potential partners to push against China in exchange for tariff reliefs. Given the support for free trade from world leaders, such a move could isolate the US which may put further pressure on the greenback; DXY -0.52% d-o-d. Second, the GBP rallied and was the best performing currency under our coverage after a UK/EU deal was reached for the transition period immediately after Brexit; GBP +0.60% d-o-d. Then, a report that ECB policymakers are in synch for a rate hike by mid-2019 with a debate over the path of the hikes supported the common currency; EUR +0.38% d-o-d. Overall the main variable in the near term for FX markets is the Fed meeting. The USD is likely be supported should the FOMC firm up the view for an additional fourth hike in 2018 although the rebound could be limited in amplitude given the lingering risks (upside to 90. for the DXY). Else, anything differing from four hikes would be perceived dovish and should weigh on the USD; we are neutral USD.

¨   AxJ Markets: Most Asian Rates & FX traded with a cautious tone ahead of the March FOMC meeting, with investors keeping a keen eye on Mr Powell’s upcoming press conference, his first as chairperson. USD/Asia crosses remained within our defined support/resistance level, and we expect subdued movements across the space prior to the FOMC meeting. While most Asian central banks hold a sanguine view towards the state of the global economy, most prefers to hold a neutral policy bias amid lingering and emerging global risks, which should remain supportive of growth within the region.

¨   As stated above, the Sterling Pound was the best performing currency under our coverage. The GBP rallied after the announcement of a provisional agreement on the terms of a 21-month period after Brexit. For instance, the UK will retain the benefit of EU’s single market for two years while being able to decide to be part of EU’s foreign policy. However, Conservative criticised concessions especially those on immigrations as nothing would change for another two years. The political risk remains elevated in the UK and we keep the view that the GBPUSD is capped in the short term below 1.4090/1.4265.