Lighter USD Positioning Ahead of NFP Print Due Tonight

2 September 2016

Rates & FX Market Update

Lighter USD Positioning Ahead of NFP Print Due Tonight

Highlights

¨   Global Markets: While no surprises were seen for the jobless claims data, contraction in the ISM Manufacturing Index (Aug: 49.4; Jul: 52.6), weighed by the new orders, production and employment sub-indices. This dampened investors’ optimism towards a sooner than expected FFR hike, spurring some profit taking activities on USD ahead of NFP print tonight while UST yields declined modestly. Expect NFP to be a strong catalyst for FOMC September FFR decision, with DXY rally likely to falter and decline towards the 94.0 handle should NFP disappoints. Meanwhile, GBPUSD surged yesterday to 1.327 (+1.03%) following the surprise upside on UK’s Manufacturing PMI (Aug: 53.3; Jul: 48.3), which expanded on the back of strong new orders from domestic and export markets, aided by the weaker GBP. With post Brexit uncertainty continuing to loom, sustainability of the strong activity alongside rising cost of inputs remain a deep concern, underscoring our mildly bearish GBP and mild overweight GILT stance.

¨   AxJ Markets: While South Korean 2Q GDP climbed further to 3.3% y-o-y (previous estimate: 3.2%), officials cited increasing downside risk for 3Q, with growth likely to moderate as temporary tax cuts for cars expire. Position for another 12.5bps BoK rate cut in 4Q16, which is likely to keep yields on short dated KTBs anchored. Elsewhere, Thai CPI inched higher to 0.3% (Jul: 0.1%) while manufacturing PMI remained in contraction (Aug: 49.8; Jul: 49.3), spurring small gains on ThaiGB curve as the subdued inflationary pressures alongside weak domestic economy signal room for BoT to reduce rates by 25bps; maintain mild underweight ThaiGB duration. Elsewhere, yields on IndoGBs edged lower by 3-6bps yesterday, as easing CPI prints continue to fuel BI’s policy maneuverability, where we expect another 25bps BI rate cut in 4Q; keep a neutral stance on IDR.

¨   AUDUSD retraced higher to 0.755 (+0.48%), buoyed by stronger Chinese PMI data, which indicated expansion within the manufacturing and services sector. While US NFP is likely to hold a large influence on AUDUSD today, we keep a keen eye the 2Q GDP as subdued commodity prices alongside slow economic rebalancing continue to fuel RBA’s accommodative stance, weighing on AUD over the medium term.