FOMC Minutes Reinforced Expectations for an Impending FFR Hike, Supporting the USD Rally

13 October 2016

Rates & FX Market Update

FOMC Minutes Reinforced Expectations for an Impending FFR Hike, Supporting the USD Rally

Highlights

¨   Global Markets: The September’s FOMC minutes reinforced investors’ expectations of an impending FFR hike over the coming months, with consensus among the committee on the strengthening labour market, declining threats from the external economic conditions and improving global financial conditions. Probability for a FFR hike in December’s meeting continued to hover at the high of 67.6%, supporting moderate strength on USD; yields on USTs remained stable where we see opportunities for investors to add long positions as yields inch higher. Meanwhile, the strong EU IP print failed to buoy strength on EUR, with the pair falling lower to 1.10 overnight. Yields on 10y EGBs traced higher by 3-12bps overnight, where we continue to see value in holding an overweight view on core EGBs as political woes continue to weigh on peripheral sentiment.

¨   AxJ Markets: While the South Korean economy continues to face uphill obstacles to quash the decelerating growth momentum, policymakers’ concerns on the accelerating household debt formation continue to bind BoK’s near term maneuverability, underscoring the central bank’s decision to hold rates at 1.25% this morning. We eye BoK’s updated economic growth forecasts due later in the day, where further moderations may support our view of another 12.5bps BoK rate cut over 4Q; maintain neutral stance on KTBs over the near term. Elsewhere, Malaysia’s August IP expanded by 4.9% y-o-y (Jul: 4.1%; consensus: 5.3%), driven by higher utilities and manufacturing activites, but unlikely to buoy optimism in the market as wide expectations remain for 2016 GDP to print within the government’s forecast of 4.0-4.5% (FY15: 5.0%). We expect BNM to reduce OPR by 25bps over the coming months, which could underpin attractiveness on MGS, on top of its decent carry within the AxJ region.

¨   USDJPY climbed to its 2-month high yesterday at 104.25 (+0.69%) following the release of FOMC minutes, which reiterated FOMC’s hawkish stance. USDJPY remains predominantly driven by USD appetite despite the approval of Japan’s fiscal stimulus package, although investors remained hesitant to extend short JPY positions amid the uncertain global outlook, without any aggressive measures from BoJ; maintain neutral stance on JPY.