G3 Central Banks Held Fire; AxJ FX Broadly Stable Despite Lingering Easing Speculation

5 May 2016

Rates & FX Markets Monthly Review

G3 Central Banks Held Fire; AxJ FX Broadly Stable Despite Lingering Easing Speculation

Highlights

¨   US & UK: Fed held rates as expected, weakening the USD. Despite easing concerns over global economy, Fed’s officials noted adverse US factors such as weaker than expected GDP (0.5% 1Q16, weakest performance since 1Q14) and inflation with weaker than expected CPI. As such DXY decline further by 1.6% m-o-m. USTs were under pressure with yield closing 6bps higher for the 10y and climbing once again to the 1.90/2.00% area where long opportunities appeared.  Over in UK, GBP gained on dollar weakness and perceived lower likelihood of Brexit as per latest survey polls. Gilt yields climbed 9-18bps m-o-m on strong March core inflation reading (1.5% y-o-y) and the lack of incremental dovish dissents within BoE’s MPC, despite the fragile wage momentum.

¨   Eurozone: ECB’s Draghi reaffirmed its commitment and confidence towards NIRP leaving the deposit rate at -0.4% with monetary policy is likely to remain accommodative for the foreseeable future keeping the door open for further measures until growth and inflation pick up. Officials have yet to gauge the impact of asset purchase extended to non-financial IG bonds as well as new LTRO program.  EUR however inched higher by 0.62% and 10y yields widened in Germany and peripheral countries. 

¨   Japan & Australia: BoJ took markets by surprise by keeping its policy unchanged in April while holding off additional stimulus to assess the impact of NRIP which has bolstered strong gains for the Yen across the board. JPY continued appreciation is likely to put pressure on BoJ, especially as latest economic data highlighted the struggle against inflation.  JGBs were in a bull steepener configuration with 2y and 10y yields tightening -5bps and -4 m-o-m respectively.  In Australia, RBA held policy rates at 2.0% while voicing their rising discomfort with the appreciating AUD, where minutes later revealed that monetary conditions remain very accommodative. Dovish RBA bets surged post-inflation release, where 1Q16 CPI printed at a mere 1.3% y-o-y, providing RBA with ammunition to cut rates as necessary; front-end ACGB yields and the AUD declined m-o-m.

¨   Developed AxJ: Underperformance in short SGS tenors underpinned by lingering MAS easing speculations; South Korean electoral upset built the case for further BoK easing. MAS surprised with its decision to ease slope of SGD NEER to a neutral stance, supporting a brief upward climb on USDSGD post MAS MPS. The pair however recorded a 0.31% decline m-o-m to 1.344, largely driven by softer USD movements; underperformance in SGS were skewed towards the short end of the curve, as MAS’s downward revision in headline CPI suggested room for MAS to ease further, dulling the allure of short tenors. Turning to South Korea, KTBs remained resilient, with yields remaining unchanged m-o-m as the ruling Saenuri Party was denied of a Parliamentary majority, placing the onus on BoK to cut rates further to tackle the tepid domestic economy. Additionally, 4 new BoK board members are also expected to shift the central bank’s rhetoric towards the dovish end, partially offsetting appreciation pressures on KRW; USDKRW declined 0.35% to 1139. Elsewhere, HKGBs tracked USTs closely, with yields climbing 5-17bps m-o-m while USDHKD remained stable above the 7.75 boundary, with the softer USD movements unable to materially offset the NEER and REER overvaluations.

¨   Emerging AxJ: Declining PBoC rate cut prospects amid strengthening economic data. In spite of the broadly weaker USD, movements on USDCNY and USDCNH climbed by a mere 0.38% and 0.36% respectively, supported by resilient PBoC Yuan fixings. CGB curve bear flattened m-o-m, with yields on 2y adding 23bps m-o-m amid heightened concerns on Chinese corporate defaults alongside recent spate of stronger data dulling the prospect of further PBoC rate cuts. Over in Thailand, outflows from the Thai bond market spurred a bear steepening ThaiGB curve m-o-m, with concerns of higher net supply weighing on sentiment; THB outperformed within the AxJ region, appreciating by 0.64% m-o-m to 34.9/USD, with prudent reserve management likely to shield the kingdom from external gyrations. On to Malaysia, MGS yields widened 6-11bps m-o-m despite a huge negative CPI surprise (2.6% y-o-y; consensus: 3.4%) on higher global yields, while higher oil prices and weaker USD failed to drive significant gains in MYR, with the USDMYR pair relatively stable m-o-m. Investors appear to take comfort with the appointment of Datuk Ibrahim as the new BNM governor, whose relative familiarity with BNM workings should ensure a smooth transition and policy continuity. In Indonesia, BI’s shift in monetary policy benchmark from the BI rate (6.75%) to the 7D reverse repo rate (5.5%) should allow the bank to exert greater control over short rates, spurring a 19bps decline in 3y IndoGB yields. The USDIDR pair fell 0.45% m-o-m, where the attractive carry is likely to continue lure investors below the 13,500/USD level. Over in India, 3y GSec yields failed to edge lower m-o-m despite RBI slashing rates by 25bps, where the bank vowed to improve rate transmission mechanism and keep monetary conditions easy.