Strong US Data Bolstered December Rate Hike Prospects

7 October 2016

Rates & FX Market Update

Strong US Data Bolstered December Rate Hike Prospects

Highlights

¨   Global Markets: US initial claims fell more than expected, printing 249k (consensus: 256k; prior: 254k) and bringing the 4-week MA to new multi-year lows. DXY and UST yields climbed 0.67% and 2-4bps overnight on the strong claims data, ahead of the NFP later tonight; stay neutral USD. Elsewhere, GBPUSD continued its downward descend, with the pair trading at the 1.23 handle during Asian morning; the pair also briefly crashed to an intra-day low of 1.1841, some attributing it to the lack of liquidity. We maintain our mildly bearish stance towards the GBP, as the UK moves towards a “hard” Brexit scenario. In the EU, ECB minutes revealed that the governing council remains willing to continue its aggressive monetary policies until the bloc’s outlook improves, while acknowledging supply challenges which hinted towards an adjustment in its QE purchase program. EGB yields and the EUR declined, with the above likely to ease near-term concerns of an imminent tapering; stay mildly bearish EUR. In Japan, nominal cash earnings disappointed at -0.1% y-o-y (consensus: 0.4%), while real cash earnings remained positive due to deflation in core CPI, challenging the government’s and BoJ’s efforts to revive prices and wage growth. We continue to opine for BoJ to deliver further rate cuts over the coming meetings, although we maintain our underweight JGB call due to poor risk-reward ratio.

¨   AxJ Markets: Chinese foreign reserves dipped to USD3.16trn in September (Aug: 3.19trn; consensus: 3.18trn), although the pace of declines slowed on receding capital outflow pressures, while it still remains a lingering threat to the stability of the CNY. Amid a quiet holiday week, USDCNH surged above the 6.70 psychological on the strong US data, with little apparent intervention from PBoC’s agency banks; we reiterate our mildly bearish stance towards the CNY.

¨   USDIDR remained mostly near the 13,000 psychological level overnight, as optimism over the tax amnesty program continues to spur inflows into the nation’s assets. The Finance Ministry revealed that Indonesia has achieved 60% of its tax revenue target, partially supported by penalties from the amnesty program; avoiding the need for further spending cuts should remain beneficial to 2016’s GDP growth; stay neutral IDR.