Rates & FX Market Update
Flash PMI in EU and US Scheduled Today Likely to Drive Sentiment
¨ Global Markets: The US President Donald Trump casted clouds on the upcoming June 12 North Korea / US summit saying there is “a very substantial chance it won’t work out”. Yet global markets’ response was relatively muted on Tuesday with Treasuries broadly unchanged while the US Dollar closed marginally lower (DXY retreated -0.07%) somewhat confirming the Trump normalization (at least towards his communication) combined with the absence of major economic catalyst. We can expect higher volatility towards the end of the week with the releases of the Fed minutes, and US and EU Markit PMI in particular, where economic surprise differentials will drive FX gyrations.
¨ AxJ Markets: The Thai Bhat was the best performing currency under our coverage, leading the EM Asia FX rally against the backdrop of a softer USD as trade tensions eased, unaffected by protests in Bangkok and a wider trade deficit. Furthermore, the THB rallied in a lagged reaction to the publication of the strong 1Q18 GDP growth print as we reported yesterday. While EM FX have been under pressure since mid-April with the USD rebound, improving fundamentals in Asia over recent years may provide a cushion to external factors as compared to other region such as Latam. The strong Thai growth story combined with the current account surplus situation should give some support to the THB although we prefer to remain neutral as the USD strength is expected to last with higher US rates.
¨ The Malaysian Ringgit was the second best performing currency (after the THB see above) posting the first daily gain following the election; MYR was +0.30% higher against the USD. While reserves marginally declined as of 15th May to USD109.4bn (109.5 prior), Bent rose offering a support to the commodity-related currency. The pace of the recent MYR decline may somewhat soften as investors adjust to the change of government and policies, provided for instance that the removal of GST does not materially deteriorate the country’s finance.