ECB & BI to Stand Pat in the Week Ahead

17 October 2016

Rates & FX Market Weekly

ECB & BI to Stand Pat in the Week Ahead

Highlights

¨   Global Markets: The final round of Presidential debate is scheduled on Wednesday with little impact to expect on markets (besides MXN and CAD). US CPI is anticipated to pick up in September (1.5% y-o-y) bolstering the case for a December hike as CPI inches towards the 2% Fed’s target; remain neutral USD. In the UK, expect a heavy economic calendar with CPI, retail sales, PSNB and labour data due, although unlikely to materially reverse the current bearish sentiment towards GBP as uncertainties towards an eventual UK exit lingers on. While trade-weighted GBP declined c.16% since the referendum (after recent losses), we opine for a mildly bearish view on GBP to be appropriate, as discussions over Brexit strategies continue to spook markets. In Europe, after a status quo at its September meeting, the ECB reconvenes and is unlikely to unveil changes for now while in our view the Council may pave the way for an extension of its APP (alongside regulatory changes) to be announced in December. Portugal’s IG credit rating by DBRS, reviewed on Friday, is crucial to qualify under ECB’s purchase program. Although a cut is unlikely, concerns over high yields (3.11% 10y YTD average) and tepid recovery could change the outlook and pose contagion threats; remain neutral EUR. Finally in Japan, amid a light economic calendar, global sentiment will act as a main driver and we continue to expect the USDJPY to evolve within the 100 / 105 range. Elsewhere, Australian employment data is expected to improve from August, while RBA minutes will be closely scrutinised as the Bank’s saunguine outlook remains relatively sanguine over Australia’s labour market. Governor Lowe’s speech is also likely to attract attention, ahead of the important 3Q16 CPI print due end-October; stay neutral AUD.

¨   AxJ Markets: Heavy Chinese economic calendar in the week ahead, where we expect the steady growth in IP, retail sales, aggregate financing and 3Q GDP to overshadow the downside surprise on Chinese exports released in the preceding week. However, the USDCNY pair is likely to continue bearing the brunt of any USD strength in the week ahead; maintain mildly bearish CNY. Meanwhile, Singapore’s weak NODX print may reinforce the weak outlook and challenges faced by the export oriented economy, underscoring an underperformance of SGD against its regional peers; maintain mildly bearish. Over in South Korea, expect healthy demand for the 10y KTB auction, with a modestly stronger Chinese data underscoring support for the KRW; view tightening 3/10y KTB spreads as opportunities to add on steepeners. Elsewhere, Thai economic data is likely to take a back seat, with keen attention focusing on the Thai crown prince succession; new Thai King may complicate plans for the democratic elections scheduled next year amid political uncertainty concerns, supporting our mild underweight ThaiGBs view. In Malaysia, September CPI due is unlikely to materially shift BNM’s dovish-leaning stance given the still-low inflation. Investors are likely to focus more on the upcoming 2017 Malaysian budget for signs of the nation’s commitment towards fiscal consolidation, alongside the impact on consumption and investment given the slowing growth drivers; remain constructive on the MYR over the medium term. Over in Indonesia, BI is likely to stand pat in its October rate decision, having previously delivered a 25bps rate cut in September. Nevertheless, we do not think the easing cycle is over yet with inflation remaining within the lower half of BI’s 3-5% target range; stay constructive towards IndoGBs. With few key economic data due in India, expect global developments to drive movements in Indian assets in the week ahead, while RBI easing expectations are likely to exert downward pressure on yields over the near term; stay constructive on Gsecs.

   

Weekly Positioning

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