Prospects of FFR Hike Over the Coming Months Drove Asian FX Underperformance Against USD

31 May 2016

Rates & FX Market Update

Prospects of FFR Hike Over the Coming Months Drove Asian FX Underperformance Against USD

Highlights

¨   Global Markets: With US financial markets closed in observance of Memorial Day yesterday, major crosses remained subdued while Asian FX underperformed the USD as Fed’s Yellen echoed the hawkish Fedspeak and reiterated the likelihood for FOMC to raise rates in the coming months should economic conditions permit. We expect USTs to continue trading on a soft note as US financial markets reopen, with supportive PMI and labour data likely to continue to pressure yields on short dated USTs higher; maintain mild overweight duration on USTs. Meanwhile, short covering on JPY drove the USDJPY pair firmly above 110 overnight (+0.65%), as the strengthening USD amid increasing FFR hike prospects alongside increasing pressure for BoJ to implement further monetary easing tug both currencies in opposite directions. Yields on JGBs are likely to remain subdued as BoJ continue to dominate the market, while we recommend for investors to switch to a mildly bearish stance on JPY amid the uncertain economic outlook entangled with prospects of a sales tax hike delay and Japanese snap elections.

¨   AxJ Markets: Despite upward revision in South Korean’s March IP, the disappointing print in April continued to raise doubts on a steady economic recovery as government officials remained hesitant on further fiscal stimulus. We reiterate our view for another 25bps BoK rate cut which could come as early as June’s meeting, preferring to hold a neutral duration stance on KTBs alongside a mildly bearish view on KRW, with a YE16 forecast of 1,240 for USDKRW. Elsewhere, Malaysia’s 1MDB coupon payment was made after missing 2 payments earlier, but failed to buoy strength on MGS or MYR as FOMC decision remained in focus; expect the USDMYR pair to remain sensitive to gyrations from the USD, where we maintain a neutral stance on MYR.

¨   Bearish pressure on CNY mounted following hawkish Fedspeak over the past weeks, including Fed’s Yellen on Friday, which cemented expectations for a 25bps FFR hike over the coming months. While weaker PBoC yuan fixings are likely to guide the USDCNY pair higher over the coming weeks, we continue to eye the PMI data due this week, which could further dampen sentiment on the Chinese economy and spur further outflows.