Fed’s Brainard Dampened Prospects of Earlier Monetary Tightening, Weighing on USD

13 September 2016

Rates & FX Market Update

Fed’s Brainard Dampened Prospects of Earlier Monetary Tightening, Weighing on USD

Highlights

¨   Global Markets: Fed governor, Brainard’s comments reinforced the cautious Fed rhetoric, citing her preference to witness stronger trend in US consumer spending and inflation before supporting further monetary tightening. Probability of 2016 FFR hike declined to 57.4% (previous: 60.4%), spurring modest gains in USTs across the curve; demand for the 3y and 10y UST auctions were relatively softer. Maintain tactical mild overweight USTs underscored by relative attractiveness vis-à-vis global peers. Meanwhile, keen focus remains on GBPUSD, which climbed to the top of its 1.306-1.336 trading range ahead of heavy economic data releases later this week, where investors continue to look towards a modest rebound in economic activity in August, supporting an incrementally neutral BoE over the near term.

¨   AxJ Markets: Even with the bulk of Asian markets closed for the festive season yesterday, AxJ FX recorded marked underperformance, with USDMYR climbing higher to 4.1325 (+1.48% overnight), weighed by the weaker movements on Brent oil prices. Elsewhere, the continual climb in CNH interbank rates to the highest since February compound on liquidity concerns, spurring a rise in CNH CGB yields. While most attribute the rise in interbank rates to quarter end rebalancing factors, the persistent capital outflows is likely to continue to fuel depreciation expectations on CNY and CNH; maintain mildly bearish CNY, with expectations for the pair to test the 6.70 resistance over the coming weeks. Over in India, the easing CPI print failed to offset pessimism from the weaker IP, with INR depreciating by another 0.37% to 66.92/USD. While external headwinds continue to pose challenges to India, RBI’s active intervention in FX market is likely to cushion volatility; maintain neutral INR.

¨   USDKRW soared overnight to 1113 (+1.37%) as heightening geopolitical tensions, and weak economic outlook weighed on the high-beta currency. While strong current account surplus and capital inflows remained supportive of near term KRW strength, risk from narrowing policy rate differential alongside weak growth drivers amid economic rebalancing underscores our mildly bearish stance over the medium term.