EUR Failed to Sustain Post EU PMI Data Gains Amid Profit Taking

24 August 2016

Rates & FX Market Update

EUR Failed to Sustain Post EU PMI Data Gains Amid Profit Taking

Highlights

¨   Global Markets: Steady expansion in US manufacturing PMI alongside robust New Home Sales failed to dampen demand for the 2y UST auction, which garnered a BTC of 2.83x with cutoff yields at 0.760% (Jul: 2.52x; 0.760%). Indirect bidders accounted for 45.8% of the issuance (Jul: 29.9%) as investors downplayed the likelihood for September FFR hike. Investors continue to eye Fed’s Yellen speech at Jackson Hole where we expect DXY to remain in the consolidative phase above the 94.0 handle. Meanwhile, EU’s Services PMI surprised (Aug: 53.1; Jul: 52.9) while manufacturing PMI held firm (Aug: 51.8; Jul: 51.8), driving EURUSD to an intra-day high of 1.1356. The EURUSD pair subsequently declined to 1.1306 amid profit taking, further exacerbated by strong US data; position for a mildly bearish EUR over the medium term, with entries toward 1.14/USD attractive to add short positions.

¨   AxJ Markets: Singapore’s CPI fell by 0.7% y-o-y (June: -0.3%), weighed by the transport and housing segment. Marginal movements were seen on USDSGD overnight, where we maintain our mildly bearish bias on SGD, as the subdued CPI alongside challenging economic outlook continues to build the case for further MAS easing in October. Elsewhere, positive steps were taken in Thailand yesterday with the Cabinet approving draft laws which could boost the Kingdom’s investment competitiveness with 10 Special Economic Zones and the THB10bn fund to lure high tech sector investments. Additionally, FY17 budget disbursements are also expected to frontloaded, with 33% expected to be disbursed by 4Q16 (1QFY17), where investments <THB2m and investments between THB2m-THB1bn is expected to be disbursed latest by 1QFY17 and 2QFY17 respectively. Yields on ThaiGBs inched lower, with the recent spate of bombings likely to weigh on confidence, prompting BoT to ease rates further.

¨   Even as BoJ’s Kuroda refrained from commenting on monetary policy yesterday, the USDJPY pair continued to test the 100 support before retracing higher following better than expected US data prints. While another likely BoJ rate cut in the September meeting may ease downward pressure in the pair, weak near term outlook for USD alongside safe haven demand may keep USDJPY strugging to push beyond 103.