US Data to be Closely Watched on Recent Fed’s Attempt to Recalibrate FFR Expectations; Further CNY Weakness to Negatively Impact AxJ FX

23 May 2016

Rates & FX Market Weekly

US Data to be Closely Watched on Recent Fed’s Attempt to Recalibrate FFR Expectations; Further CNY Weakness to Negatively Impact AxJ FX

Highlights

¨   Global Markets: Fed‘s attempt to recalibrate market expectations suggests that a rate hike depends on both improving data and global risks. As such, second reading on 1Q16 GDP, PMIs and Initial Claims will be closely scrutinised for any hint towards a possible rate hike during the summer; remain mild overweight UST which inched higher as expected towards the 1.90/2.00% psychological resistance for 10y. In Europe, ECB is working to implement the further QE measures announced in March and appear to make summer relatively calm watching their effects on output and inflation yet ready to act if needed.  PMIs and German GDP will guide in that sense policy makers for a review of the policy stance; remain mildly bearish EUR. Over in UK, revised 1Q16 GDP is expected to remain unchanged; barring a huge surprise, the revision is unlikely to materially influence sentiment, where investors take comfort with declining Brexit odds as indicated in recent polls. However, May consumer confidence due may disappoint as uncertainties persists; stay neutral GBP. Japanese markets seem to have stabilised which offers some relief, although ongoing discussions on the 2017 tax hike could spur further volatility. Remain neutral USDJPY watching 110.60 for Yen appreciation underpinned by safe haven demand. On a relatively quiet week in Australia, comments from RBA’s Stevens and Debelle may shed insights to policy plans, while 1Q16 private capex data due should affirm Australia’s slowing mining investments; stay mild overweight ACGBs.

¨   AxJ Markets: Over in China, investors are likely to keep a keen eye on the USDCNY pair which continues to test its 3-month high, fueling concerns of a protracted phase of weakness in CNY over the near term which could negatively impact AxJ currencies. Demand for the CNY35bn 3y CGB reopening is likely to be average given receding expectations for PBoC rate cuts, where we opine for current yields to be attractive; remain positioned for PBoC rate cuts in 2H16. Meanwhile, the heavy data week in Singapore could support the upward momentum on the USDSGD pair, underscored by lackluster improvements in the CPI and IP prints while detailed 1Q GDP data prints are unlikely to offer much optimism; maintain mildly bearish SGD. MAS will also issue the 10y SGS, where the SGD2.5bn auction is likely to garner a firm response from domestic players given the recent climb in yields; tight 10y SGS-UST spread continue to dull the allure of SGS in relative terms. Elsewhere, an update from Moody’s on South Korean’s sovereign rating is expected next week, where we opine for it to be a non-mover; maintain mildly bearish on KRW while eyeing the G7 meeting for any hints of JPY intervention. Turning to Thailand, Thai custom exports may continue to surprise investors on the upside, support resilience on the USDTHB pair over the week; maintain neutral THB while keeping a mild underweight duration stance on ThaiGBs. On no economic data releases in Malaysia, Indonesia and India, expect asset movements to remain driven by re-pricing of FOMC expectations and global market sentiment, alongside second order impact from commodity prices.

   

Weekly Positioning

	Rates	FX
Overweight
Mild Overweight	UST, C.EGB, ACGB
Neutral	GILT, HKGB, MGS, SGS, KTB, P.EGB, CGB, IndoGB, GSec	USD, HKD, INR, GBP, MYR, IDR, JPY, AUD, THB
Mild Underweight	ThaiGB	EUR, SGD, KRW, CNY
Underweight	JGB