Hints of FOMC Members Towards Normalising FFR Buoyed Modest Rise in UST Yields; BoE & BoK Held Rates

13 May 2016

Rates & FX Market Update

Hints of FOMC Members Towards Normalising FFR Buoyed Modest Rise in UST Yields; BoE & BoK Held Rates

Highlights

¨   Global Markets: Fed’s Rosengren (dove) and George (hawk) hinted their inclination towards normalizing FFR at a rate faster than market expectations, buoying a modest rise on UST yields overnight. Demand for the 30y UST new issue was average, contrasting the stellar response seen for 3y and 10y earlier, garnering a BTC of 2.19x despite higher cutoff yield at 2.615% (Apr: 2.40x; 2.596%); DXY spotted a modest round where we eye potential catalyst for the strong momentum from Fedspeak and FOMC minutes next week for incrementally hawkish propensity leading up to June’s meeting. Elsewhere, GBP was unchanged after a whipsaw session driven by BoE’s Carney warnings on the dangers of Brexit in the press conference following the central bank’s status quo rate decision without dovish dissents. BoE inflation report added that uncertainties surrounding the EU referendum weighed on UK economic recovery while reducing growth outlook for the next 3 years; stay cautious on GBP.

¨   AxJ Markets: BoK held rates at 1.5% while citing uncertainties surrounding economic growth path; eye BoK press conference which could offer insights on the overall policy inclination following the additions of 4 new members. We maintain our view for BoK to reduce rates by 25bps, with BoK likely to priortise growth over curbing household debt; remain constructive on short dated KTBs. Malaysia’s IP eased to 2.8% y-o-y (Feb: 3.9%), weighed by contractions in mining production. USDMYR remained firmly above the 4.00 major support where we expect the currency pair to remain sensitive to political noise out of Malaysia; maintain neutral stance on MYR. Elsewhere, India’s CPI surged to 5.4% (Mar: 4.8%) driven by higher food prices, threatening RBI’s 5% target for the year; expect RBI to hold rates over the near term, focusing efforts on improving policy rate transmission; keep a neutral stance on INR.

¨   The decline in consumer inflation expectations reinforced further easing likelihood for RBA in 2H16, exacerbated by bearish momentum on iron ore prices over the past month. We remain cautious on the AUD over the near term, with any further retracement in commodity prices and challenging Chinese growth trajectory to weigh on AUD strength; Philip Lowe, the upcoming RBA governor, is likely to support monetary policy continuity.