BoE Purchases to Continue Supporting a Flatter GILT Curve

12 August 2016

Rates & FX Market Update

BoE Purchases to Continue Supporting a Flatter GILT Curve

Highlights

¨   Global Markets: The uptick in oil prices supported risk sentiment, as UST yields drifted higher overnight across the curve. The 30y UST auction was average, stopping through the WI by 0.3bps at a HY of 2.274%, although BTC fell to 2.24x (previous: 2.48x). Indirect demand fell to 61.5% (previous: 68.5%), indicating some cautiousness among foreign buyers in the super long tenor, although we remain mild overweight USTs over the medium term as DM yields continue to face downward pressure. The Gilts curve continued to mirror global yield curves, with dovish BoE stance supporting risk appetite in the market; while front yields edged higher overnight, long yields continued to fall since BoE’s failure to meet its long-dated Gilt purchase target on Tuesday. The curve could remain under flattening pressure as traditional investors in the long end (pension funds, insurers) appears unwilling to part with their holdings, despite huge capital gains YTD; stay mild overweight UK duration, and revising our 5/20y flatteners target.

¨   AxJ Markets: Malaysia’s June IP climbed 5.3% y-o-y, outperforming consensus and May’s print (2.5% and 2.8% respectively), driven by electricity and mining productions. The rebound in oil prices overnight drove USDMYR briefly below the 4.0 handle this morning, before retracing above the 4.0 psychological level. The 2Q16 GDP print due later today will be closely watched, with any downside surprises likely to drive further dovish bets; stay neutral MYR, with the currency likely to remain sensitive to movements in oil prices over the near term. Over in India, outgoing RBI governor Rajan continue to hold the view that the INR remains fairly valued at current levels, with inflationary risks lingering on within the economy. With both historical and implied INR volatility remaining low, carry flows can continue to underpin stability in the currency; stay neutral INR.

¨   AUDUSD inched lower overnight but remained elevated with the recent RBA rate cut failing to dampen AUD’s upward ascend. While RBA remains of the view that a stronger FX may complicate efforts to rebalance the economy, alongside knock-on effects on the already-weak inflation, the bank appears to have relatively little influence over the AUD over the near term, given dovish inclinations elsewhere; stay neutral AUD.