Investors Remain Cautious Ahead of Fed’s Yellen Speech

26 August 2016

Rates & FX Market Update

Investors Remain Cautious Ahead of Fed’s Yellen Speech

Highlights

¨   Global Markets: Relative to the 2y and 5y UST auctions earlier this week, the 7y UST auction was lackluster ahead of Fed Yellen’s speech later today, with HY printing at 1.423% (WI: 1.41%) and BTC at 2.383x (previous: 2.514); dealers took 31.3% of the supply, the most since February. Economic data due overnight were mixed, with stronger Durable Goods Orders balanced by a weaker flash services PMI; we remain mild overweight USTs. Over in Japan, inflation continues to underwhelm expectations, as July headline CPI printed -0.4% y-o-y while the BoJ preferred measure printed 0.3% y-o-y (previous: 0.5%): USDJPY remained marginally above the 100 support level post-print. The soft print is likely to continue exerting pressure on the BoJ to deliver more in the September meeting amid its ongoing policy review; remain neutral USDJPY, with the pair likely to continue testing the 100 psychological level over the near term.

¨   AxJ Markets: South Korean consumer confidence climbed to an 8-month high in August, although high levels of household debt and the government’s risk management efforts may limit the pace of debt-fueled consumer spending. KRW outperformed the AxJ complex overnight on the better data, although the currency is likely to remain sensitive towards USD or JPY movements; stay mildly bearish KRW as further BoK easing remains on the cards. BI remains optimistic over Indonesia’s inflation outlook, eyeing a possibility that CPI may stay below 3.5% y-o-y by end-2016, depending on the government’s commitment to manage food prices that accounts for a significant portion of the CPI basket. Subdued inflation continues to provide BI with further room to ease monetary policies as necessary, support gains in IndoGBs despite revenue shortfalls of up to IDR218trn; stay constructive on IndoGBs.

¨   USDINR was relatively unchanged overnight, where the pair has been stable since the announcement of Mr Urjit Patel as the new RBI governor. Investors are likely to view Mr Patel as a safe choice, given his past credentials as the deputy governor. Given the above, we think carry flows into INR assets are likely to persist, as global investors continue to seek yields, further augmented by INR’s low historical volatility.