14 August 2014
Rates & FX Market Update
Dampened Global Recovery Prospects Weighed on Market Sentiment;
Strong UST & Bund Auctions; BoK Cut Rates to Boost Growth
Highlights
¨ Persistent
risk-off markets further shored by the weak overnight data releases supported
both the 10y UST (USD24bn) and 10y Bund auctions. The 10y UST was sold at
2.439% and drew increased demand from indirect bidders, before closing 2bps
lower. Similarly, the 10y Bund (EUR5.4bn) printed at a record low yield of
1.08% with a thin tail. The German government intends to reduce the
outstanding amount of Bunds in a submission to parliament yesterday, from
EUR206.1bn this year to EUR189.4bn in 2015, suggesting a negative net supply
which could keep the record low yields on Bunds longer. Else, Carney
continued to dampen expectations for a BoE rate hike this year which bolstered
demand for short term Gilts (-8 to -10bps); GBPUSD broke its near term
support of 1.6675. On data, weak US retail sales growth fueled worries
of the nascent recovery in US while a contraction in Eurozone’s IP added
pressure for ECB to introduce additional easing on top of weaker growth
expectations from the region due later today. The JPY weakened to an
intra-day low of 102.54 after a dismal preliminary 2Q GDP print (-6.8%
y-o-y).
¨ In
Asia, KRW erased some of the previous day’s
rally depreciating 0.27% against the USD ahead of the 25bp BoK rate cut to
2.25% this morning to complement ongoing government stimulus given the weak
domestic demand recovery. Else, positive data prints in China
were overshadowed by an unexpected drop in new Yuan loans (Jul:
CNY385.2bn) where the PBoC attributed the slowdown to seasonality factors
and a high base factor; CNY held firm at 6.1542.
¨
GBPUSD broke the 1.6675 support after BoE
revised wage forecasts lower. Carney’s dovish comments dampened expectations
for an earlier rate hike, contrasting his comments in June; BoE rate hike
expectations shifted from February to May 2015 resultantly. The lack of
bullish reversal signals suggests FX investors to avoid premature long
position; remain neutral for now.
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