Russia’s Pledge to Support OPEC Efforts Buoyed Commodity Currencies

11 October 2016

Rates & FX Market Update

Russia’s Pledge to Support OPEC Efforts Buoyed Commodity Currencies

Highlights

¨   Global Markets: Even as UST markets were closed, USD rally continued to gain traction following the second Presidential debate. Polls indicated a wider lead for a Clinton victory, supporting the premise for economic policies to remain in line with the current form, partially easing uncertainty concerns. With the array of Fedspeak scheduled this week, efforts to neutralise the softer than expected NFP print and reinforce a FFR hike by YE16 could drive further upward momentum on UST yields; 10y UST could climb towards the 1.90% resistance, offering opportunities to add long positions. Meanwhile, stronger German export data did little to ease the pessimism within the bloc as impending Brexit negotiations continued to weigh on sentiment. EGBs continued to underperform alongside GILTs, where the slump in GBP over the past week undermined expectations for further BoE easing amid heightening inflation concerns from the currency pass through; maintain mildly bearish GBP.

¨   AxJ Markets: USDCNY surged to 6.7075 (+0.54%) yesterday as the Chinese financial markets reopened after a week long National holiday, guided by the higher PBoC Yuan fixing. Initial fears of a disorderly break at the 6.70 resistance were quickly negated, as USDCNY remained sticky near the fixing rate and below the 6.71 handle, while USDCNH recorded a marginal climb to 6.7194 (+0.15%); maintain mildly bearish stance on CNY, with the pair expected to trend higher to 6.82 in 2Q17. Elsewhere, India’s IP declined by 0.7% y-o-y (Jul: -2.5%), weighed by the contracting mining and manufacturing segment. Expectations remain for IP to improve in 2H16, underscored by civil service pay revisions and the upcoming festive season, which could support stronger demand; further RBI rate cuts are likely to continue favouring strong demand for GolSecs over the medium term.

¨   With Russia and OPEC accounting for half of the world’s oil output, Russia’s pledge to join OPEC in stabilising the oil market buoyed optimism, supporting a strong rise in Brent oil price while underscoring resilience in MYR. However, expect optimism to be short lived on the oil front given Iran and Iraq’s likely absence in OPEC meeting this week; remain cautious on MYR ahead of FY17 budget on 21 Oct as Malaysia reinforces fiscal prudence.