The Final Countdown to EU Referendum Begins

23 June 2016

Rates & FX Market Update

The Final Countdown to EU Referendum Begins

Highlights

¨   Global Markets: IMF has downgraded US 2016 GDP forecast to 2.2% (previous: 2.4%), while reiterating its inclination for a very gradual pace of FFR hike, which could reduce the risk of disinflation. Yields on USTs inched lower overnight ahead of the EU referendum held today. We position for 1 FFR hike towards the end of the year, as the decision is likely to remain driven by economic data assessment amid easing uncertainty from EU referendum; expect 10y UST yield to edge higher to 1.90% by YE16. Meanwhile, GBPUSD has continued to surge higher to 1.478 (+0.73% overnight) ahead of referendum polls beginning this afternoon, recording an impressive 3.31% jump week-to-date as investors continue to downplay the likelihood of a “Leave” scenario despite the tight race while EU’s Juncker warned UK policy makers and voters on the irreversible nature of withdrawal on the union membership; we prefer to remain on the sidelines ahead of the vote, keeping a neutral stance on GBP at current prices.

¨   AxJ Markets: BoT opted to hold its policy rates at 1.50%, citing the need to preserve policy space amid stabilizing domestic growth and downside risk from global economy. We have revised our view and expect BoT to reduce rates only in 4Q16, as BoT is likely to take comfort in the declining financing cost and accommodative monetary conditions amid strong demand from offshore and domestic investors driving yields on ThaiGBs lower; maintain neutral stance on THB while we remain apprehensive on extending duration on ThaiGB. Meanwhile, MAS announced its decision to include CNY financial investments in its foreign reserves from June, following IMF’s SDR basket, while KRW and ZAR are expected to be added into RMB’s CFETS basket at 12% and 2% weights respectively as direct trading commences; expect greater volatility on the CNY going forward.

¨   The USDSGD pair breached the 1.400 support yesterday, with SGD appreciating by another 0.32% amid the softer USD. With SGD NEER currently trading at the upper half of the SGD NEER band, we remain of view that further SGD gains beyond the April 2016’s low at 1.335/USD remain limited by the band; keep to a mildly bearish stance on SGD over the medium term.