The Final Countdown to US Presidential Elections

8 November 2016

Rates & FX Market Update

The Final Countdown to US Presidential Elections

Highlights

¨   Global Markets: Investors’ attention remained fixated on the US Presidential Election, with results due Asian morning hours, where yields on USTs rose by 3-6bps alongside the broad USD (+0.74%), buoyed by FBI’s decision that Clinton should not face criminal charges. We expect Clinton’s victory to provide a conducive environment for FOMC to raise FFR by 25bp in December, weighing on short dated USTs. Elsewhere, EU’s retail sales decelerated, expanding by 2.2% y-o-y compared to 2.6% reported for August, weighed by decline in sales of non-food items. Although recent movements in the EGB market remained heavily influenced by risk sentiment stemming from US, with peripheral EGBs outperforming its core counterparts, political risks within the peripheral region continue to constrain our appetite as the Italian referendum draws near, underscoring our mild underweight stance.

¨   AxJ Markets: While China’s foreign reserves to import ratio remains strong at 21.9 months, the magnitude of decline in foreign reserves in October at USD46bn continues to underscore vulnerability stemming from USDCNY as authorities attempt to smooth volatility on the depreciating CNY. USDCNY edged higher by 0.30% to 6.7766 against the backdrop of strengthening USD, where we reiterate our mildly bearish stance, with a target of 6.87 by 3Q17. Over in Indonesia, 3Q GDP growth slowed to 5.0% y-o-y (2Q: 5.2%), dampened by the weak exports despite the modest rise in commodity prices. Short dated IndoGBs recorded small gains yesterday, where the softening growth alongside subdued CPI could boost the case for another BI rate cut in the coming months. Heightening political tensions are expected in Hong Kong, with the introduction of national security law following the removal of 2 pro-independence lawmaker; movements on HKGBs expected to mirror USTs in the week ahead.

¨   The USDJPY pair edged higher by 0.40% yesterday following indications of Clinton lead ahead of the Presidential results alongside FBI’s review on the Clinton’s email scandal which indicated that Hillary Clinton should not face criminal charges. We expect volatile movements on major FX crosses in the day ahead, with safe haven currencies such as JPY to surge in the event of results too close to call or Trump’s victory.