Strong 3Y UST Auction on Strong Foreign Demand Amid Relatively Low Global Yields

10 August 2016

Rates & FX Market Update

Strong 3Y UST Auction on Strong Foreign Demand Amid Relatively Low Global Yields

Highlights

¨   Global Markets: USTs were broadly stronger across the board overnight, after a stellar 3y auction which garnered a BTC of 2.98x (previous: 2.69x) and a HY of 0.85% (WI: 0.86%; previous: 0.765%). Foreign demand was strong, with indirect demand accounting for 56.9% of the issuance, despite a recent resurgence of FFR hike expectations. While we remain mild overweight towards USTs over the medium term, we advise against adding 10y USTs aggressively at current levels. In UK, estimates from NIESR suggested that growth moderated in July to 0.3% q-o-q (June: 0.6%), placing the odds of a technical recession by end-2017 at a staggering 50%, compelling the BoE to stay accommodative to support the economy; stay bearish GBP with the GBPUSD pair testing the 1.30 psychological level once again. Elsewhere, Japanese machine orders got a boost in June (+8.3% m-o-m; May: -1.4%), although unlikely to drive any sustained optimism as the country struggles with low potential growth; stay neutral JPY.

¨   AxJ Markets: Chinese CPI dipped slightly to 1.8% y-o-y in July (Jun: 1.9%), following the relatively disappointing July trade data on Monday (exports -4.4% y-o-y; imports -12.5%), underscoring our call for PBoC to deliver further monetary easing measures in 4Q16; stay constructive towards short-dated CGBs. Over in Indonesia, the planning ministry forecasted 2017 GDP and CPI growth at 5.3% and 4% respectively, while eyeing an acceleration in growth over 2H16 likely on pre-emptive rate cuts and government spending; stay neutral IDR as BI aims to keep the currency conducive over the medium term. In India, outgoing RBI governor Rajan kept the policy rate unchanged at 6.50%, and vowing to ensure ample liquidity within the banking system, sending yields on Gsecs 1-5bps lower overnight; we reiterate our neutral stance towards Indian govies.

¨   USDMYR fell 0.22% overnight, mirroring mild gains in other AxJ currencies. Recent gains in oil prices supported MYR sentiment, as OPEC’s announcement of an informal meeting in September drove optimism that the cartel will reduce production and lift crude prices. MGS foreign ownership jumped to 51.9% in July (Jun: 49.8%) as investors actively seek higher yields, underpinned by BNM’s dovish stance; remain neutral MYR.