Investors to Remain Fixated on US Economic Data Amid the Divided FOMC

26 October 2016

Rates & FX Market Update

Investors to Remain Fixated on US Economic Data Amid the Divided FOMC

Highlights

¨   Global Markets: Movement on USTs were mixed yesterday, with yields on short dated USTs continuing its upward climb overnight. Demand for the 2y UST new issuance was soft, garnering a BTC of 2.53x (Sep: 2.65x) despite higher cutoff yields at 0.855% (Sep: 0.750%) as recent hawkish Fedspeak advocating for FFR hikes beyond investors’ expectations dampened aggressive bids at the auction. We opine for investors focus to remain fixated on US economic data amid the divided FOMC, with a strong 3Q GDP print due in the week ahead likely to be a strong catalyst to drive DXY’s break above the 99 resistance. Meanwhile, volatile session was seen for EURUSD yesterday as ECB’s Draghi speech dispelled lingering concerns of ECB taper while pledging to keep the current monetary framework in place until the inflation target has been achieved. EURUSD retraced higher to 1.089 towards the end of the trading session, underscored by strong German data which dampened prospects of further ECB rate cuts over the coming months; maintain mild overweight duration bias on core EGBs and neutral stance on EUR.

¨   AxJ Markets: MAS Macroeconomic Review has reinforced the weak economic outlook, citing lackluster external demand and weak global trade to exert pressure on the export oriented economy. Despite so, MAS expects the slack to be partially offset by growth in modern services and domestic oriented industries, with unemployment rates likely to rise modestly in the year ahead. Yields on SGS inched lower yesterday, with SGS spreads over USTs remaining tight given flushed liquidity within the domestic economy; USDSGD remained sticky at the 1.390 handle, where we expect the pair to continue treading higher to 1.420 by 3Q17, weighed by the weak economic outlook and lingering expectations of further MAS easing, keeping SGD NEER trading at the bottom band.

¨   AUDUSD climbed further this morning to touch an intraday high of 0.7709 post CPI data release which indicated a quicker than expected rise in CPI (3Q: 1.3%; 2Q: 1.0%). Although CPI prints remain comfortably below RBA’s inflation target of 2.0-3.0%, the uptick is likely to dull immediate calls for further RBA rate cuts, with the central bank likely to keep a keen eye on the extent of labour market slack; maintain neutral AUD.