Light Positioning Ahead of Significant Event Risks Over the Week

20 September 2016

Rates & FX Market Update

Light Positioning Ahead of Significant Event Risks Over the Week

Highlights

¨   Global Markets: Market movements were relatively subdued overnight ahead of the highly-anticipated FOMC and BoJ policy meetings later in the week. UST yields climbed c.2bps across the curve, despite investors pricing in a low likelihood for September rate hike (FFR futures implied probability: c.20%). With 10y yields below 1.75%, we prefer to be tactically long USTs, eyeing for a less hawkish Fed; stay mild overweight USTs. Elsewhere, European peripheral yields tightened c.1-5bps overnight on better risk sentiment and speculations that Italy will hold off its 50y syndicated BTPS issuance amid the current volatility. Near-term event risks for the bloc includes the upcoming Hungarian and Italian referendums, with Italian PM Renzi slated to announce the referendum date in the week ahead; remain constructive on core EGBs versus peripherals.

¨   AxJ Markets: Offshore Yuan liquidity remained tight, with the overnight CNH HIBOR climbing to 23.683% yesterday (15 Sep: 7.95%), amid strong speculations of interventions in the offshore markets to fend off bearish CNH bets; USDCNH remains under the 6.70 level. Any renewed USD strength will further exert bearish pressure on the CNY & CNH, but remain adequately managed to avoid a repeat of events seen during Aug 2015 and Jan 2016; stay mildly bearish CNY. Elsewhere, BoT governor Veerathai revealed that the bank is unconcerned over the THB strength, with the currency moving in line with other AxJ currencies. We opine for BoT to remain active in the FX market, with its strong foreign reserves cover demonstrating credibility in managing volatility; stay neutral THB. In Indonesia, BI hinted further room for easing as a senior deputy governor mentioned that rates should be slightly above the CPI, compared to the current gap of c.2.5%; stay constructive on short-dated IndoGBs.

¨   USDMYR climbed c.0.2% to 4.138 overnight, as mild USD weakness and subdued September FFR hike expectations supported sentiment, even as the upcoming BoJ decision remains a source of uncertainty. The Venezuela-induced rally in oil proved short-lived, weighing down on the MYR marginally this morning; expect the MYR to remain highly sensitive to movements in oil prices (and the USD) over the near term.