Lack of Clear Signal for 2016 FFR Hike Drove Strong Gains on USTs

28 July 2016

Rates & FX Market Update

Lack of Clear Signal for 2016 FFR Hike Drove Strong Gains on USTs

Highlights

¨   Global Markets: While FOMC left rates unchanged, the lack of clear signal for a 2016 FFR hike drove strong gains on USTs, with yields on 10y edging below the 1.50% handle once again. Fed’s George remained the sole dissenter in the team of 10 FOMC voters, with the uncertainty surrounding the global economic growth engine spurring FOMC’s “data dependent” communique underscoring our mild overweight UST stance. While the broad USD underperformed overnight (-0.11%), we opine for USD to remain resilient over the coming weeks, as global central banks continue to signal prospects for further easing amid the sluggish domestic growth. Prime Minister Abe confirmed the size of fiscal stimulus to be JPY28trn after weeks of speculations, with details of the package expected to be announced in the coming week, supporting the upward rebound of USDJPY above 105 yesterday. Keen attention remains on BoJ’s MPM tomorrow, with investors positioning for BoJ to complement the fiscal stimulus; prefer to remain on the sidelines ahead of BoJ MPM as BoJ’s status quo policy could drive USDJPY back to the 100 handle.

¨   AxJ Markets: Indonesia announced the second cabinet reschuffle, with the Finance Minister role returning to the experienced Sri Mulyani Indrawati, who was the Finance Minister previously from 2005-2010. Yields on IndoGBs declined by 5-10bps while USDIDR fell to 13,137 (+0.29%), testing the 13,050 support once again; keep a neutral stance on IDR, underpinned by capital flows from tax amnesty program. Elsewhere, Thailand’s customs exports declined for the third month, mirroring weak exports within the region given the tepid demand from global economy; Sharp decline in imports drove the widening trade surplus. USDTHB remained sticky at 35.0, where we opine for political uncertainty following the August referendum to remain contained, supporting a neutral THB stance.

¨   While Australis’s 2Q headline CPI eased modestly to 1.0% y-o-y (1Q: 1.3%), core CPI climbed higher dampening market’s expectations for RBA to reduce rates next week. Nonetheless, sluggish outlook for Australian economy is likely to fuel expectations for a dovish RBA over the medium term which could continue to exert bearish pressures on AUD against a broadly strengthening USD.