6 January 2017
Rates & FX Market Update
Underwhelming
ADP Data Spurred Strong Gains on USTs
Highlights
¨ Global
Markets: UST curve bull flattened overnight, with yields diving by 5-10bps
post ADP employment data as the lackluster print spurred investors to claw back
optimistic bets ahead of NFP due later today. Although Fed’s Williams asserted
that 3 FFR hikes in 2017 are reasonable, he highlighted uncertainties regarding
future fiscal and other policies which sent the broad DXY lower by 1.06%.
Today, in addition to NFP, wage growth is expected to have accelerated;
overall conflicting factors support our neutral stance on both USTs and USD
over the near term. Meanwhile, strong expansion in UK’s services PMI
supported a modest 0.77% climb on GBPUSD yesterday but failed to break the 1.25
resistance as the looming Article 50 trigger continued to weigh on sentiment. We
reiterate our mildly bearish stance on GBP given the likelihood of a more
aggressive Brexit strategy while a neutral BoE inclination should remain
favourable to our neutral GILT duration view.
¨ AxJ
Markets: China’s Caixin services PMI continued to improve to 53.4 (Nov:
53.1), underpinning the expectation for stability of Chinese economic growth.
Yields on 10y CGB climbed to 3.2% amid a bear steepening CGB curve, where a
prudent PBoC monetary policy inclination is unlikely to support further
protracted gains on CGBs over the medium term amid rising yields within the
global and regional bond markets; maintain neutral duration view on CGBs.
KRW appreciated sharply to 1,186 (+1.67%), mirroring gains on Yuan as rising
interbank rates squeeze short CNY bets. Weak global trade outlook however is
likely to bolster the case for another 12.5bps BoK rate cut; keep a short
duration tilt on KTBs.
¨ Surging funding cost spurred
unwinding of bearish bets on the offshore Yuan, which supported another day of
robust gains on CNH to 6.8006 (+1.12%). Ahead of US President’s inauguration,
we expect CNH to trade firm over the near term amid allegations of Chinese
currency manipulation alongside worries an overly bearish Yuan could undermine
China’s financial stability.
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