BoE Carney’s Affirmed Intentions to Steer UK Through Its Exit from EU, Dispelling Near-term Uncertainties

1 November 2016

Rates & FX Market Update

BoE Carney’s Affirmed Intentions to Steer UK Through Its Exit from EU, Dispelling Near-term Uncertainties

Highlights

¨   Global Markets: The USD was broadly unchanged overnight even as the November FOMC meeting and the US presidential election drew closer; polls and odds putting the possibility of a Trump presidency at c.25-30% currently, sufficiently large to pose risks. September PCE Core print was unchanged at 1.7% y-o-y, and unlikely to alter the Fed’s view towards a gradual rate tightening; stay mild overweight USTs. In the UK, BoE governor Carney dispelled rumours of an early departure, affirming his intention to stay till June 2019, providing a boost to GBP overnight (+0.42% against USD). Despite the above short-term reprieve, difficult negotiations with the EU are likely to cloud UK’s medium-term outlook, ahead of an uncertain path post-Brexit; stay mildly bearish GBP. Over in the EU, SPGBs outperformed overnight as Spain sworn in its new minority government after months of deadlock, although the current status remains far from stable without a parliamentary majority; overweight core EGBs versus peripherals.

¨   AxJ Markets: Official Chinese PMIs indicated improving conditions, with the manufacturing and services prints ticking higher to 51.2 (consensus: 50.3; Sep: 50.4) and 54.0 (Sep: 53.7) respectively. Amid stabilising growth, PBoC is likely to remain neutral for the remainder of 2016, underpinning our neutral CGB stance. In South Korea, October CPI climbed to 1.3% y-o-y (consensus: 1.1%; Sep: 1.2%), although export growth remains sluggish at -3.2% y-o-y. We continue to opine for BoK to cut rates by 12.5bps over 4Q16, as the bank struggles to balance rising household indebtedness and weak economic sentiment; stay mildly bearish KRW. Elsewhere, ASEAN manufacturing PMI dipped into contractionary territory (49.2; Oct: 50.5), as conditions in Singapore, Malaysia and Indonesia deteriorated, and likely to support lingering easing expectations in the respective economies.

¨   USDJPY climbed 0.18% overnight, remaining near the 105 key level, where the +3.4% uptick in USDJPY over the month of October was largely due to USD strength. With our expectations for BoJ to stand pat later today, and investors bracing for a potential December US rate hike, expect the JPY to remain dollar-driven over the coming months; stay neutral JPY, with the USDJPY pair likely to average 101 over 3Q17.