29 July 2016
Rates & FX Market Update
Brexit Uncertainty Weighed on
Consumer Sentiment, Fuelling BoE Rate Cut Views in the Week Ahead
Highlights
¨ Global
Markets: Modestly higher jobless claims did little to sway sentiment on
USTs, with movements on the curve remaining relatively subdued post FOMC
statement. Decent demand was seen for the 7y UST issuance which garnered a BTC
of 2.51x despite a lower cutoff yield and coupon of 1.340% and 1.250%
respectively (June: 2.56x; 1.497%; 1.375%) as FOMC appeared to provide
little signals towards an imminent rate hike over the coming quarter,
underscoring our mild overweight stance on USTs. Meanwhile, GBP
underperformed despite the softer USD overnight, with the sharpest drop of GfK
Consumer Confidence in more than 26 years reigniting Brexit concerns, fueling
speculations towards a 25bps a BoE rate cut in the week ahead; remain
positioned to sell GBP on strength.
¨ AxJ
Markets: Singapore’s unemployment rate climbed to 2.1% in 2Q (1Q: 1.9%),
with the services sector accounting for the bulk of the layoffs (62%).
Expectations for a sluggish economic outlook alongside increasing global risks
could continue to exert pressure on the economy, fueling speculations for
MAS to re-centre the SGD NEER in October; maintain mildly bearish SGD.
Turning to South Korea, IP posted a soft growth of 0.8% y-o-y in June (May:
4.7%), compounding on the optimism within the market following the release of
stronger than expected 2Q GDP growth. However, KTBs continued to post strong
gains, with 10y UST-KTB spread sustaining its 6-month high of 13bps on further
easing expectations; maintain neutral stance on KTBs. Elsewhere, Thailand’s
manufacturing output climbed for the fourth consecutive month but remained
constrained by the tepid external demand; maintain neutral view on THB
with expectations for political uncertainty to remain contained amid the
Constitution Referendum.
¨ Strong appetite for risk assets
following the release of FOMC statement spurred sharp appreciation on KRW to
its 9-month high of 1125/USD. With CNY, the currency of its largest trade
partner, testing new lows and expected to continue depreciating over the medium
term, the strong performance on KRW is likely to erode the attractive of
South Korean exports, further exerting pressure on the sluggish economic
recovery.
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