Disappointing Japanese Fiscal Stimulus Package Sent JGB Yields and the JPY Higher

3 August 2016

Rates & FX Market Update

Disappointing Japanese Fiscal Stimulus Package Sent JGB Yields and the JPY Higher

Highlights

¨   Global Markets: The underwhelming Japanese fiscal stimulus package sparked a selloff in JGBs and a sharp rally in JPY to the 100-handle, compounding on the disappointing BoJ decision last week. PM Abe revealed a JPY28trn fiscal package, although only JPY7.5trn consists of new spending, dampening future growth trajectory. Expect the USDJPY to test the 100 level over the coming weeks, although the scope for any BoJ easing surprises remains on the cards; remain neutral JPY. In the US, personal income and spending continued to grow in June (0.2% and 0.4% m-o-m respectively), reinforcing the 2Q16 GDP report which indicated robust consumption. This failed to spur inflationary pressures, where core PCE remained stable at 1.6% y-o-y. 10y USTs fell in line with global bond markets, although losses were milder versus Bunds or JGBs; stay mild overweight USTs. In Australia, RBA reduced rates by 25bps as expected, sending ACGB yields lower overnight, in contrast with global yield movements. However, the AUD climbed 0.93% overnight, as the statement failed to signal a more dovish tone; stay neutral AUD, where there is no compelling reason for RBA to shift towards a neutral stance at this junction.

¨   AxJ Markets: Singapore’s PMI continues to indicate sluggish manufacturing activities (49.3; Jun: 49.6), where we eye MAS to ease the NEER in October amid heightened downside risks; stay mildly bearish SGD, with the USDSGD pair likely to remain mainly dollar driven over the near term. Elsewhere, we expect BoT to stand pat during its MPC meeting later today, instead eyeing for a 25bps rate cut in 4Q16. The upcoming Constitution Referendum is unlikely to deliver a major political surprise, with the impact on Thai assets likely to be marginal; stay neutral THB, underpinned by robust foreign reserves and subdued volatility.

¨   GBPUSD edged 1.31% higher overnight to 1.3352 on USD weakness and outperformance in the construction PMI (45.9; consensus: 44.0). BoE reconvenes on Thursday alongside new economic forecasts, where we expect the bank to deliver a 25bps rate cut at the very least, although BoE have to deliver stronger easing measures for the GBP to decline further; stay bearish GBP over the near term.