Higher Volatility Ahead of the Tightening US Election

7 November 2016

Rates & FX Market Weekly

Higher Volatility Ahead of the Tightening US Election

Highlights

¨   Global Markets: With the US election still too close to call, tightening polls heightened higher regime of volatility crystalizing fears associated to a Trump Presidency. If so, expect a FX knee-jerk reaction while long term effects could be softer than anticipated on more centrist than extreme policies. Independently of the result, maintain a mild overweight UST stance as (i) if Clinton wins, attention will quickly shift towards the Fed with rates trajectory to remain shallow and; (ii) if Trump wins, risk-off is likely to boost UST.  After an eventful week in the UK, the calendar appears relatively quiet with only IP and trade balance due. The data prints are expected to improve marginally, though a significant surprise is likely to influence GBP movements; remain mildly bearish GBP. In Europe, US election results will be scrutinized in light of next year European elections amid an uncertain political landscape. EC economic forecasts due may offer insights into possible QE extension if estimates remain grim. In Japan, expect the US election to drive the USDJPY although BoJ’s minutes could draw attention with an evaluation of the first effects of the yield curve control; remain neutral JPY. In Australia, business and consumer confidence should remain supported by accommodative RBA policies, while home loan data may shed insights into the housing markets; stay neutral AUD, with global markets and Chinese data key drivers in the week ahead.

¨   AxJ Markets: Key Chinese data to remain closely watched, with foreign reserves expect to edge lower m-o-m but unlikely to fuel risk aversion; exports and CPI print are unlikely to deliver surprises, where we expect yields on CGBs to continue their modest upward climb given declining PBoC easing expectations. Meanwhile, weak economic growth outlook compounded by heightening political woes could impel BoK to reduce rates by 12.5bps this week; expect 3/10y KTB spreads to revisit July’s low, offering steepener opportunities. In Singapore, USD strength may weigh on October’s foreign reserves, but the USDSGD pair is more likely to take directional cues from USD amid a hectic week. Elsewhere, concerns on the fragile domestic economy in Thailand may build a compelling case for BoT to reduce policy rates by 25bps as early as this week, fuelling softer movements on THB; maintain mild underweight duration skew on ThaiGBs, with further monetary policy maneuverability likely to be limited. Amid divisive political headlines in Hong Kong, 3Q GDP data is likely to be watched, where stabilizing Chinese economic growth remains supportive of the city state outlook; remain tactically cautious on adding HKGBs on risk-on repositionings. Malaysia 3Q GDP is likely to hog headlines, with a dip from the 2Q16 4.0% print fueling BNM easing expectations over the coming meetings; stay constructive on front-end MGS. Elsewhere, Indonesia 3Q GDP is expected to remain healthy at 5.1% y-o-y, underpinned by rising confidence and a cumulative 100bps rate cuts YTD; expect IDR to remain resilient over the near term on stronger foreign reserves level. In India, IP is expected to improve in September after 2 consecutive contractions, reinforcing the solid growth. Expect volatility to remain contained over the near term amid RBI’s willingness and ability to smoothen any adverse movements via liquidity injections and/or interventions.

   

Weekly Positioning

	Rates	FX
Overweight
Mild Overweight	UST, C.EGB, ACGB, MGS, IndoGB, GolSec	MYR
Neutral	SGS, HKGB, KTB, CGB, Gilts	USD, AUD, JPY, HKD, THB, IDR, INR, EUR
Mild Underweight	P.EGB	SGD, KRW, CNY, GBP
Underweight	JGB