Investors to Seek Clarity From Yellen’s Speech as FOMC Members Remain Divided Over US Policy Trajectory

22 August 2016

Rates & FX Market Weekly

Investors to Seek Clarity From Yellen’s Speech as FOMC Members Remain Divided Over US Policy Trajectory

Highlights

¨   Global Markets: After the mixed FOMC minutes, investors will look forward to a possible clarification from Yellen’s speech due on Friday and watch economic data - Core PCE, PMIs, Capital Goods and the second GDP reading (expected to be revised lower to 1.1%) - to gauge the economic recovery as latest data disappointed, in any attempt to warrant a rate hike this year. Our base case remains a 0-1 rate hike for 2016, in December rather than September if any; remain mild overweight Treasuries which appear attractive below 1.60%. In Europe, PMIs for France, Germany and the block are due on Monday while German IP and GDP reading are likely to draw attention onto the zone’s health post Brexit, a cause of concern for ECB ready to act should conditions failed to improve; remain mild overweight EGBs. Investors can expect a relatively quiet week ahead in the UK with only the revised 2Q16 GDP print due, where any weakness is unlikely to exert any significant drag on the GBP after the above-consensus July data releases in the previous week; GBP likely to be driven by majors in the week ahead. In Japan, as BoJ only reconvenes on September 21^st, USDJPY will take cues from the broad Dollar direction as well Manufacturing and Services PMI and CPI. As economic situation is not showing any improvement in data, any poor reading will continue to exert further pressure onto BoJ; remain neutral USDJPY with the 100 handle likely to remain challenged. Over in Australia, expect the AUD to remain sentiment-driven on little key local events in the week ahead, as investors eye the Jackson Hole symposium; stay neutral AUD.

¨   AxJ Markets: The quiet economic calendar in China is likely to keep the CNY movements neutral, taking cues from the broad USD movements as Yuan fixings remain stable ahead of the September G20 meeting in Hangzhou. Barring sharp movements in the USD, expect the 6.70 USDCNY resistance to hold over the immediate term, with our mildly bearish call over the medium term remaining unchanged. Elsewhere, while Hong Kong exports and imports are expected to contract, they are unlikely to materially influence HKGBs, with yields remaining low ahead of the September Legislative Election; stay neutral HKGBs on regional safe haven demand. Despite the quiet economic calendar in South Korea, movements on USD and JPY are likely to impact sentiment towards the KRW, alongside any progress on the supplementary budget that could lift the nation’s growth outlook and confidence; stay neutral KTBs. In Singapore, a poor July CPI and IP print may provide further impetus towards another MAS easing in October, following the disappointing releases of GDP, retail sales and NODX over August; maintain mildly bearish SGD. Over in Malaysia, July CPI is expected to fall further to 1.1% y-o-y (Jun: 1.6%) on base effects, which should keep incremental easing hopes alive since BNM delivered a surprise rate cut in its July meeting. Further USD softening should drive MYR’s outperformance among AxJ peers, given the currency’s high beta and sensitivity to oil prices; stay neutral MYR. Elsewhere, Thailand exports are expected to decline in July, pressuring the BoT towards further easing measures to boost the domestic economy, compounded by the impact on tourism and domestic confidence due to the recent bombings; maintain preference over short-dated ThaiGBs. With little economic data releases in Indonesia and India, expect asset movements to take cues from global developments and month-end rebalancing flows.

   

Weekly Positioning

	Rates	FX
Overweight
Mild Overweight	UST, C.EGB, ACGB, Gilts
Neutral	SGS, HKGB, KTB, CGB, MGS, IndoGB, GolSec	USD, AUD, JPY, HKD, MYR, THB, IDR, INR
Mild Underweight	P.EGB	EUR, SGD, KRW, CNY, GBP
Underweight	JGB