Sustained Momentum on USD Rally to Lie on 3Q GDP Data Due Today

28 October 2016

Rates & FX Market Update

Sustained Momentum on USD Rally to Lie on 3Q GDP Data Due Today

Highlights

¨   Global Markets: Improving US initial jobless claims and stronger pending home sales underpinned expectations towards a probable FFR hike in December, supporting another strong climb on UST yields yesterday; yields on 10y UST rose to 1.85%, a level last seen in May 2016. Ahead of US 3Q GDP data due today, we continue to see strong positioning biased to a solid GDP print, where we see opportunities for investors to add exposure on 10y USTs at 1.90%, keeping a mild overweight duration stance given skepticism for FOMC to raise FFR meaningfully beyond the 25bps hike expected for December. Elsewhere, UK GDP expanded by 2.3% y-o-y (2Q: 2.1%), but failed to lift optimism on the GBP as investors remained wary of the potential downward economic pressure post Article 50 trigger. Yields on GILTs rose 2-10bps overnight amid increasing criticism for BoE’s QE, which could undermine savers in the economy; maintain mild overweight duration bias on GILTs, with expectations for another 10-15bps BoE rate cut over the coming months.

¨   AxJ Markets: Underperformance in AxJ currencies were led by KRW, where USDKRW climbed 0.75% to 1142.5, partially attributed to the ongoing scandal surrounding President Park, with ratings for the President falling to its all-time low, exacerbating political woes stemming from a stalemate government. Meanwhile, China has concluded its 6^th Plenary session, where President Xi Jinping has been conferred the title of a “core” leader, making small steps to consolidate his position ahead of a key party congress held next year. Separately, USDCNY inched higher to 6.7835, where we reiterate our medium term cautious stance on CNY given the close proximity of the currency pair to the key 6.80 resistance.

¨   USDJPY broke the 105 psychological resistance decisively yesterday, rising to its 3-month high of 105.26 (+0.74%), buoyed by the stronger than expected US economic data which supported the appreciating USD. Momentum on the USDJPY climb is likely to rest upon US 3Q GDP and protracted extent of Japanese funds turning to offshore markets in search for yields; weak US GDP to drive the pair back to the 103.90 support.