Risk Assets Benefitted Overnight from Easing Brexit Concerns

21 June 2016

Rates & FX Market Update

Risk Assets Benefitted Overnight from Easing Brexit Concerns

Highlights

¨   Global Markets: Polls released yesterday favouring the “Remain” campaign fuelled the risk on sentiment, driving yields on USTs higher by 5-8bps across the curve; yield on 10y UST rebounded higher to 1.69% where we see short term safe haven demand likely to keep UST yields at stretched valuations amid uncertainty from the EU referendum. Meanwhile, the broad USD underperformed, as declining expectations for FOMC to raise the FFR this year prompted further repositioning away from USD; eye Fed’s Yellen testimony to Senate later today, where we opine for the Chairwoman to maintain her cautious tone, with any hawkish comments likely to be met with skepticism given the short time period since FOMC. Similarly, rising yields on core EGBs mirrored USTs while core-peripheral EGB spreads tightened amid the easing risk aversion. ECB members continued to reiterate their high propensity to ease further should a “Leave” vote materializes; keep a mild overweight on core EGBs.

¨   AxJ Markets: Dr Rajan’s decision not to renew another term as the RBI governor continued to weigh on INR, driving the USDINR pair higher to 67.32 (+0.35% overnight). While the Indian government is expected to announce a new RBI governor over the coming months, concerns continue to mount on the resolve for India to continue battling inflation and the new governor’s resolve to maintain RBI’s independence amid strong calls from the government to reduce rates to spur growth; remain cautious on INR. Over in South Korea, although KRW outperformed its AxJ peers yesterday, appreciating by 1.05% to 1161/USD, we continue to hold a mildly bearish stance, underpinned by the high beta nature of KRW, South Korea’s reliance on external demand, and declining allure of KRW assets; USDKRW likely to test the 1200 resistance over the coming months.

¨   AUD benefitted from the stronger risk sentiment, surging to 0.746/USD overnight (+0.42%) ahead of RBA June meeting minutes release. With the brief hiatus in FOMC FFR normalisation, we see room for another 25bps RBA rate cut towards late 2016, which could drive softer movements on AUD, grinding towards the 0.700/USD handle by 2Q17 while the global macro overlay remains a strong catalyst driving currencies; maintain mildly bearish.