FOMC Minutes Drove a Repricing of Market Expectations

19 May 2016

Rates & FX Market Update

FOMC Minutes Drove a Repricing of Market Expectations

Highlights

¨   Global Markets: UST yields surged 6-8bps while DXY climbed 0.56% overnight after FOMC minutes revealed that a June rate hike remains firmly on the cards if labour and inflation data remained supportive towards fulfilling the Fed’s dual mandate. FFR futures now indicates a c.32% probability of a June hike, compared to c.12% before the minutes, as investors remain unconvinced that the Fed will act in June given lingering macro risks alongside the upcoming EU referendum. 10y yields have now moved back towards the 2% handle, where the strong psychological resistance is likely to be in place; stay mild overweight USTs. Over in UK, labour data printed stronger than expectations, with average weekly earnings including bonuses climbing 2.0% y-o-y in March (consensus: 1.7%), although unemployment rate remained steady at 5.1%. With yet another poll result indicating declining likelihood of Brexit, GBP gained 0.95% overnight against the USD despite the latter strength, although we remain cautious at this stage given the significant proportion of undecided voters (c.12%); stay neutral GBP.

¨   AxJ Markets: The hawkish FOMC minutes and the strengthening USD drove declines in AxJ FX overnight, with further losses seen in IDR, MYR and KRW this morning, returning earlier gains profitted from dovish Fed expectations. Over in Malaysia, USDMYR edged towards the 4.10 handle as declines in oil prices compounded by the strong USD ahead of BNM bi-monthly meeting later today. We expect no change to the OPR at this juncture given stabilising economic conditions, although we keep a keen eye on the statement for any shifts in policy stance; stay neutral MGS. BI also reconvenes later today, where we again expect no policy surprise ahead of the August transition in benchmark policy rates; stay neutral IndoGBs.

¨   EURUSD fell 0.80% overnight to 1.1221, mainly driven by a resurging USD. April CPI came in at -0.2% y-o-y, while core CPI remained steady at 0.7%, reaffirming relatively subdued price pressures within the economic bloc. We stay mildly bearish towards the EUR, with further ECB actions increasingly likely as low inflation remains a threat to the bank’s mandate, alongside resurgent political and event risks within the bloc.