BoE Laid the Ground For Further Monetary Easing

1 July 2016

Rates & FX Market Update

BoE Laid the Ground For Further Monetary Easing

Highlights

¨   Global Markets: DM yields tumbled overnight after BoE’s Carney hinted fresh easing measures, with front-end Gilts rapidly approaching 0% since the EU referendum. We continue to reiterate our call for BoE to reduce rates by c.50bps over the coming months, with possible re-implementation of QE, in order to support economic growth and liquidity; we now upgrade our Gilts call to mild overweight. FOMC’s Bullard reiterated his view of slower US growth and subdued FFR trajectory, although he played down the impact of Brexit on the US economy. Investors are likely to focus on the June FOMC minutes due in the week ahead for any hints towards the Fed’s next action, amid increasing dovish bets globally; stay mild overweight USTs. Elsewhere, while the stronger June CPI estimate (0.1% y-o-y; consensus: 0%) are likely to provide some comfort to the ECB on the price front, the bank is likely to remain cautious on any potential fallout due to Brexit, with S&P already downgrading EU to AA; stay mildly bearish EUR.

¨   AxJ Markets: While the official Chinese PMI revealed stable manufacturing (50.0; May: 50.1) and improving services (53.7; May: 53.1), Caixin manufacturing PMI pointed towards a contraction (48.6; May & Consensus: 49.2). We continue to pen in another 50bps PBoC rate cut this year as the economic outlook remains challenging, piling downward pressure on the CNY & CNH; stay mildly bearish. Over in South Korea, trade and current account balance continues to widen as exports outperformed (-2.7% y-o-y; consensus: -8.2%), while imports remained sluggish; stay constructive on front-dated KTBs as BoK continues to explore its options. Elsewhere, Thai industrial production and trade data improved in May, although elevated bond issuances, low nominal yields versus peers and lingering political issues are likely to weigh on duration appetite; remain mild underweight ThaiGBs.

¨   USDJPY climbed 0.37% overnight to the 103 handle on improving risk sentiment. Data due this morning continues to complicate BoJ’s battle against deflation threats, as headline CPI printed -0.4% (Apr: -0.3%), while core inflation also appears to be moderating; labour market and Tankan survey prints remained modestly healthy. Stay neutral JPY, with further easing likely to be in the form of QQE expansion.