Improved Risk Sentiment Supported AxJ Currencies Overnight

16 August 2016

Rates & FX Market Update

Improved Risk Sentiment Supported AxJ Currencies Overnight

Highlights

¨   Global Markets: Risk appetite remains supported overnight as oil and US equities climbed higher, dampening UST strength as yields inched 2-5bps higher across the curve. Keen attention remains on the FOMC minutes due later this week, where a hawkish read may exert further pressure on USTs ahead of the September meeting. Elsewhere, the GBPUSD pair continues to decline (-0.28% overnight) on expectations of further BoE easing, further compounded by news that the UK may not trigger Article 50 any time soon, potentially introducing further uncertainties into the UK-EU negotiation process; stay mildly bearish GBP. In Japan, the economy growth was flat in 2Q16 (0% q-o-q SA; consensus: 0.2%), as business spending slumped 0.4% over the period. Despite our opinion that further BoJ easing remains on the cards, fading central bank credibility, safe haven demand and the lack of international support for further JPY depreciation should limit most downside; stay neutral JPY.

¨   AxJ Markets: Thailand’s 2Q16 GDP growth came in at 3.5% y-o-y, accelerating from 1Q16 3.2% print and better than the 3.3% expected, on higher government and tourist spending. While the recent bombings may dampen tourist arrival numbers over the near term, the successful Constitution Referendum and the commitment towards fiscal spending to support growth should underpin THB’s relative stability among AxJ currencies; stay neutral THB. Elsewhere, Singapore’s June retail sales growth slowed to 0.9% y-o-y (May: 3.2%; consensus: 2.0%) as economic growth remains under pressure for the city state amid sluggish external demand. We continue to opine for MAS to re-center the NEER band downwards in the October meeting, fueled by the need to guard against disinflation and slowing growth, as the currency remains relatively expensive in REER terms; stay mildly bearish SGD.

¨   USDMYR edged 0.61% lower overnight, outperforming other AxJ currencies, underpinned by higher oil prices as Brent oil retraced back to the USD48/bbl handle. The recent 2Q16 consensus GDP print is unlikely to drive optimism within BNM policymakers, although dovish bets are unlikely to hurt the MYR strength over the near term, with foreign inflows bolstered by further rate cut prospects; stay neutral MYR.