¨ Global Markets: Investors continue to digest the relatively dovish FOMC minutes, with DXY and

19 August 2016

Rates & FX Market Update

ECB Minutes Hinted Possible Policy Actions in September

Highlights

¨   Global Markets: Investors continue to digest the relatively dovish FOMC minutes, with DXY and UST yields declining overnight; UST curve bull steepened, with 2y yields testing 0.7% once again. Fed’s Dudley did not make any new comments, instead reinforcing the healthy US labour growth; we stay mild overweight USTs. In the EU, minutes from the July ECB meeting revealed that policymakers were prepared to undertake further measures should conditions fail to improve, with Brexit remaining an unknown tail risk, although the bank is likely to remain cautious to avoid “fostering undue market expectations” and a repeat of Dec 2015. Overnight data continues to point towards disinflationary risks, as headline CPI printed 0.2% y-o-y, in line with consensus; stay mildly bearish EUR. GBP got a boost yesterday after July retail sales spiked higher to 5.4% y-o-y (consensus and June: 3.9%), signaling no adverse impact arising from Brexit, although we previously noted that consumer confidence has tanked post-referendum; stay mildly bearish GBP. Elsewhere, AUD got a lift after stronger-than-expected labour data; July unemployment rate ticked lower to 5.7% (Jun: 5.8%), while Australia added 26.2k jobs (consensus: 10k); stay neutral AUD.

¨   AxJ Markets: China property markets cooled marginally in August, adding to wider concerns that another traditional Chinese growth driver is losing traction. A CSJ commentary noted that China continues to face increasing domestic pressures, which could underpin further monetary policy easing, especially as its Asian peers remain dovish; stay constructive on short-dated CGBs. In Malaysia, MYR continue to post solid overnight gains (0.52% against USD) on higher oil prices, while Fitch affirmed Malaysia’s A- credit rating and stable outlook, citing positive external fundamentals; stay neutral MGS.

¨   USDIDR fell 0.21% overnight to 13,120, while the pair has enjoyed relatively low volatility in recent sessions on strong capital inflows and BI’s efforts to rebuild its foreign reserves; 1m realised volatility stands at 4.28%, the lowest since July 2015. We stay neutral towards IDR, with BI likely to continue cushioning inflows over the near term to keep the currency conducive after its c.11% gain against the USD since its Sep 2015 highs.