¨ Global Markets: FOMC minutes overnight were less hawkish than consensus expectations,

18 August 2016

Rates & FX Market Update

FOMC Minutes Delivered Mixed Messages

Highlights

¨   Global Markets: FOMC minutes overnight were less hawkish than consensus expectations, driving USD and UST yields lower overnight, as implied odds of a hike this year (via FFR futures) dipped to 48.5% (previous: 51.0%). FOMC members were divided over the timing of the next FFR hike, with some members preferring an imminent hike while others preferred to stay cautious until further evidence of rising inflation and stable economic growth emerges. We continue to expect mixed messages from upcoming Fedspeak as policymakers remain divided, alongside the need to balance market skewed expectations in order to minimise any policy surprises; stay neutral USD. Over in the UK, June unemployment rate stabilised at 4.9%, while July claimant count rate delivered no surprise as well, easing some Brexit fears as investors continue to keep a keen eye on July retail sales due later today; stay mildly bearish GBP. In Japan, trade data underperformed expectations on tepid global demand, with the strengthening yen compounding on its woes as the USDJPY 100 psychological level is likely to remain challenged in the near term; stay neutral JPY.

¨   AxJ Markets: AxJ currencies outperformed the USD this morning after losing some ground yesterday, underpinned by the less hawkish-sounding minutes, with gains led by higher-beta currencies including the KRW, MYR and IDR. Higher oil prices compounded on MYR’s outperformance this morning, with Brent testing the USD50/bbl psychological level once again amid current optimism towards a supply cut/freeze during OPEC’s impromptu September meeting; remain neutral MYR. Elsewhere, WSJ reported that India’s PM Modi may announce a successor to outgoing RBI governor Rajan this week, with both frontrunners former or current deputy governors which could ensure policy continuity to some extent as India battles rising inflation; stay neutral INR.

¨   Broad USD weakness pulled the USDCNY pair lower to the 6.62 handle this morning. Recent economic data continues to point towards a challenging growth environment, which may spur further PBoC easing actions in 4Q16, driving a marginally weaker CNY. We stay mildly bearish CNY, although we do not expect sharp movements ahead of the G20 summit in September, given the political sensitivity involved.