US Rate Expectations Continue to Reprice Higher

19 July 2016

Rates & FX Market Update

US Rate Expectations Continue to Reprice Higher

Highlights

¨   Global Markets: UST yields climbed 2-3bps overnight amid little news flow, with 10y yields now approaching the 1.60% handle following last Friday’s strong spate of data (retail sales, core CPI & IP), further underpinned by receding Turkish political concerns and a surge in US IG issuances. FFR futures now indicates a c.41% probability of another 25bps rate hike by end-2016, picking up from the July lows of c.8%; we remain of the view for 0-1 US rate hike in 2016, and stay constructive on USTs over the medium term. Over in the UK, BoE MPC member Weale questioned the need for further easing at this stage in the absence of any solid evidence of post-referendum weaknesses; GBPUSD climbed 0.29% overnight on the hawkish stance. We reiterate our view for BoE to deliver a 25bps rate cut in August, although the MPC are likely to remain divided over the timing and scale of any easing measures; stay mild overweight Gilts.

¨   AxJ Markets: USDCNY climbed past the 6.70 handle yesterday after higher USDCNY fixings, following similar movements in USDCNH in the previous week, despite the array of strong Chinese data releases last Friday. Moderation in Chinese growth concerns may dull near-term PBoC rate cut prospects and pressure CGB yields higher; stay neutral CGB. Elsewhere, MYR underperformed AxJ peers on lower oil prices and risk aversion, while BNM governor Ibrahim reiterated Malaysia’s capability to withstand external shocks, citing excess capital of c.MYR120bn in the banking industry; stay neutral MGS. In India, yields on Gsecs climbed c.2bps overnight after RBI governor Rajan dampened any likelihood of an August rate cut, reiterating that the central bank is not behind the curve and his preference for a stable INR to manage the rising inflation; stay neutral INR.

¨   USDJPY climbed 0.9% overnight to 106.17, continuing its sharp upward rebound since failing to convincingly break below the 100 psychological level, as BoJ/MoF easing bets continue to persist. Government officials continue to play down the possibility of any “helicopter money”. The JPY should remain under pressure ahead of the July BoJ meeting, where easing expectations are likely to be elevated; stay neutral JPY.