June NFP to Drive Markets’ FOMC Expectations

4 July 2016

Rates & FX Market Weekly

June NFP to Drive Markets’ FOMC Expectations

Highlights

¨   Global Markets: In the US, the focus this week will be on the June FOMC minutes due Wednesday, which may shed insights into the softening US labour market, just before the release of the June NFP and unemployment rate on Friday. Expect UST yields to remain low, while 10y papers do not appear attractive just above the all-time low at 1.38%. In Europe, a Bloomberg report suggested that ECB could possibly extend its purchases to a wider range of assets, currently limited to government bonds and non-bank IGs to balance lingering risks. Expect ECB’s President Mario Draghi’s speech to be closely scrutinised by market participant on Monday; remain mild overweight ECGBs. Over in UK, key data due in the week ahead (services PMI, IP & trade balance) are unlikely to materially impact sentiment given the close proximity to the next BoE meeting (14 July); however, expect political developments to continue impacting asset movements. Gilt auctions in the week ahead, the first since the referendum, remain key to gauge investors’ appetite, with demand likely to be fairly healthy given BoE’s inclination towards further easing; stay mild overweight Gilts and bearish GBP. In Japan, with the current JPY strength bolstered by flight-to-quality sentiment, the current account balance, due on Friday, is expected to decline for a second straight month. As such, watch JPY movement, hovering close to the key 100 resistance against the USD that could trigger concerted reactions from BoJ and MoF in the form of extended QQE and/or direct intervention. Moving back from Australia’s election, the spotlight will be on the RBA meeting on 5 July. We expect RBA to stand pat, while voicing concerns on global developments that may pave the way for further easing later in the year; stay mild overweight ACGBs.

¨   AxJ Markets: The pace of decline in Chinese foreign reserves is likely to remain closely watched as the USDCNY climb beyond 6.60; both CNY and CNH volatility are likely to remain manageable as stability remains a top priority. Other data includes Caixin services PMI and CPI, where we opine for the steady price pressure to be supportive of PBoC’s accommodative stance; remain constructive on short dated CGBs. Elsewhere in Singapore and Hong Kong, PMI data due in the week ahead may turn marginally softer given close trade ties with China. A lacklustre Singapore 2Q GDP print is likely to support further MAS easing; maintain a mildly bearish bias on SGD, further underscored by its high dependence on exports amid tepid external demand. Meanwhile, with major economic data already released for South Korea, expect the USDKRW pair to be heavily influenced by global drivers; stay mildly bearish on KRW, with downside risks exacerbated by Brexit, where we see value in taking long USDKRW positions over the medium term as South Korean authorities remain prone towards further fiscal and monetary easing policies. Malaysia and Indonesia’s economic calendar are surprisingly quiet with only foreign reserves data due, which may show a mild softening amid volatile markets in June. Expect the currencies to remain driven by global factors; stay neutral MYR & IDR, supported by accommodative DM policies. In India, a strong services PMI reading may boost confidence following the decent manufacturing PMI print, although overarching concerns over governor Rajan’s departure and surging inflation may limit any euphoria; stay neutral GSecs and INR.

   

Weekly Positioning

	Rates	FX
Overweight
Mild Overweight	UST, C.EGB, ACGB, Gilts
Neutral	SGS, HKGB, KTB, CGB, MGS, IndoGB, GolSec	USD, AUD, JPY, HKD, MYR, THB, IDR, INR
Mild Underweight	P.EGB	EUR, SGD, KRW, CNY
Underweight	JGB	GBP