Modest Expansion on Chinese PMI and Upside Surprise on 1Q GDP to Buoy the AUD

1 June 2016

Rates & FX Market Update

Modest Expansion on Chinese PMI and Upside Surprise on 1Q GDP to Buoy the AUD

Highlights

¨   Global Markets: USTs climbed amid mixed economic data, with stronger personal spending print offset by weaker consumer confidence. While Fedspeak remain suggestive of a summer FFR hike, we opine for the move to occur after the EU referendum given FOMC’s cautious disposition; maintain mild overweight USTs while keeping an eye on updated FOMC’s assessment in June’s meeting. Turning to EU, decline in German’s unemployment rate to its all-time low of 6.1% (April: 6.2%) since data collection begun in 1991 alongside steady y-o-y climb in retail sales supported EUR’s resilience, with the EURUSD pair holding above the 1.1075 support. We opine for a status quo ECB decision on Thursday, underpinned by the stabilising economic data; eye duration exposure on EGBs as impact from stabilizing commodity prices continue to filter into the region’s inflation.

¨   AxJ Markets: The modest expansion in the official Chinese PMIs eased near term growth concerns, but failed to buoy strength on CNY as PBoC continue to set the Yuan fixing weaker amid the strengthening USD. Heavy focus on FOMC’s FFR hike could continue to exacerbate depreciation pressure on CNY given capital outflow pressure; maintain mildly bearish on CNY, with expectations for another 50bps PBoC rate cut over 2H16. Meanwhile, decline in Korean exports were sharper than consensus expectations, resulting in a narrower trade surplus; BoK remains poised to reduce rates by 25bps over the coming months, underscoring our preference for short dated KTBs. While India’s GDP surged by 7.9% y-o-y in 1Q16 (4Q15: 7.2%), investors remained skeptical on the data given lackluster IP prints over the quarter. USDINR were marginally changed overnight, where we opine for RBI to hold rates as efforts remain focused on improvements to transmission channels; maintain neutral INR.

¨   Strong performance in AUD overnight (+0.67%) was buoyed by upside surprise on 1Q net export print, fuelling a strong 1Q GDP print. Despite the steady expansion in Chinese PMIs, upward momentum on AUDUSD is likely to limited as investors’ gradual receptiveness towards a FFR hike in the summer, fuelled by hawkisk Fedspeak alongside decent US economic prints; RBA likely to stand pat in the upcoming June meeting.