FOMC to Remain Divided Heading Into December’s Meeting, Limiting Further USD Strength

18 October 2016

Rates & FX Market Update

FOMC to Remain Divided Heading Into December’s Meeting, Limiting Further USD Strength

Highlights

¨   Global Markets: UST yields inched c.2-4bps lower overnight after poor empire manufacturing data alongside a modest risk-off in risk assets. Fed’s Fischer offered little hints of any imminent rate hikes, although he pointed out concerns surrounding the current low rate environment which contrasted with Fed’s Yellen comments. We remain neutral towards USD, as our view for a mild FFR trajectory is unlikely to continue sustain dollar strength over the medium term. Elsewhere, the Gilts curve continued to steepen overnight following BoE’s Carney comments that he will tolerate some overshooting in inflation in favour of growth and the labour market. We remain of the view that any upticks in Gilt yields are likely to remain contained over the near term, in view of BoE’s dovish inclination; stay mild overweight Gilts. In the EU, September CPI affirmed that inflation reached a 2-year high, although the 0.4% y-o-y final print remains far below ECB’s target. We eye the upcoming ECB policy meeting for any hints towards an extension for its APP, with any tapering premature at this point, in our opinion; stay mild overweight core EGBs.

¨   AxJ Markets: While Singapore’s September NODX printed above expectations at -4.8% y-o-y (consensus: -5.8%; Aug: 0.0%), the external demand picture remains grim and unlikely to provide a boost to the city state’s growth in the near term. While we do not rule out another MAS easing over the coming months, the hurdle remains high given the authority’s past track record; stay mildly bearish SGD, with speculators likely to keep the currency on the weak side. In Indonesia, while both export and import growth printed below expectations, a sharper contraction in imports weighed on Indonesia’s consumption outlook, with exports unlikely to pick up the slack over the near term; stay neutral IDR over the near term, with volatility likely to remain low.

¨   USDJPY fell 0.36% overnight amid mild dollar weakness, although the pair appears to be stabilising in the 103-105 range, in view of the recent dollar rally that has pushed DXY to near the 98 level. The pair is likely to remain dollar-driven over the near term, given increasing attention on the Fed as the December FOMC meeting draws near, while markets continue to hold reservations against BoJ’s recent policy shift; stay neutral JPY.