Rates & FX Market Update
Inflation Back within Target Range to Underpin BoT’s Neutral Stance
¨ Global Markets: The USD rally continued (+0.66%) despite disappointing ISM data: the manufacturing index fell more than expected in April (57.3 vs 58.5; 59.3 in March) while the survey for prices paid rose again on tariff concerns (79.3 vs 78.5; 78.1 in March). While not alarming, we remain wary of an economic slowdown in the late cycle. These data underpin our view In line with consensus that the Fed is likely to remain on hold today, with the next FFR hike probably to be in June. Another source of concern is the risk of growing supply and demand of US Treasuries imbalances in the context of surging deficit / higher financing needs concurrently to the Fed’s normalisation of its balance sheet. As such, watch the Treasury’s refunding announcement today which may exert further upside pressure on US yields. Elsewhere, the AUD fell c.0.5% against the USD overnight amid continued dollar strength. RBA delivered little surprise on the policy front, keeping its cash rate unchanged while offering no fresh forward insights that could signal an imminent tightening. The central bank remains mildly optimistic towards the domestic outlook, keeping its previous growth estimates unchanged; a neutral AUD stance remains appropriate.
¨ AxJ Markets: Over in Thailand, April CPI expanded 1.07% y-o-y (consensus: 0.92%), while core CPI grew 0.64% y-o-y (consensus: 0.67%). The quickening in headline inflation can be attributed to higher energy and vegetable prices, with BoT on track to achieve its 1-4% target. ThaiGB yields were unchanged overnight due to the Labour Day holiday, and we continue to expect no material shift in BoT’s monetary policy stance over the coming months. We initiate a tactical short USDTHB trade idea, premised on the THB being oversold at current levels, although we remain neutral over the longer term in line with our stronger dollar story.
¨ The GBPUSD slumped -1.12% d-o-d as April Manufacturing PMI dropped more than anticipated (53.9 vs 54.8; 55.1 in March) adding downside pressure to the economy which started on a slower footing in 1Q18 as reported last week. Services PMI are due today and further disappointment could bring the pair closer to 1.35 while the GBPMYR pair is now testing the 5.35 support.