Heightened US Election Uncertainty as Polls Tightened; BoJ Refrained from Further Easing, But Accommodative Bias Remains

2 November 2016

Rates & FX Market Update

Heightened US Election Uncertainty as Polls Tightened; BoJ Refrained from Further Easing, But Accommodative Bias Remains

Highlights

¨   Global Markets: UST yields were broadly stable overnight, although the DXY dipped 0.76% amid renewed risk-off sentiment, mainly attributed to polls suggesting a tightening US Presidential race; rate hike odds in 2016 dipped to 68% (previous: 71%) ahead of the FOMC meeting later today. Headline US economic data were mildly positive overnight, with Markit PMI and ISM manufacturing printing above expectations (53.4 and 51.9 respectively); we reiterate our neutral USD stance. Over in Japan, BoJ opted to hold its monetary policies as expected, despite downgrading its inflation forecasts and pushing back the timeline to achieve the 2% inflation target to FY2018 (from FY2017). Despite clear constrains on BoJ’s policy maneuverability, we do not rule out further rate cuts over the near term if conditions and inflation expectations continue to deteriorate, despite the negative impact on bank profitability; stay neutral JPY. Elsewhere, RBA maintained rates at 1.50%, with a slightly more upbeat statement on stabilising Chinese conditions and an improvement in Australia’s terms of trade. Nevertheless, we think risks to policy rates remain tilted towards the downside into 2017, though the impact on the AUD may not be significant on carry flows; stay neutral AUD.

¨   AxJ Markets: BoK October meeting minutes presented little fresh insights where we reiterate our 12.5bps rate cut call over 4Q16, underpinned by fragile external and domestic conditions. The escalating scandal surrounding President Park weighed on sentiment, sending KTB yields 2-5bps higher overnight, while replacements for Prime Minister and Finance Minister were announced this morning to contain the deteriorating political situation; stay mildly bearish KRW. Over in Indonesia, the October CPI print remained subdued, paving the way for further BI rate cuts as necessary; remain constructive on IndoGBs.

¨   EURUSD climbed 0.75% overnight as the dollar sold off overnight, surging past the 1.10 resistance level. Italy remains under pressure ahead of the constitutional referendum on December 4, where a great deal of uncertainty lingers on given the high proportion of undecided voters; 10y BTPS-Bund spread widened to 157bps, just shy from its 2y highs of 163bps. Remain cautious on EUR ahead of a possible spike in political volatility.