UK Set for a Tough Negotiating Process with the EU

10 January 2017

Rates & FX Market Update

UK Set for a Tough Negotiating Process with the EU

Highlights

¨   Global Markets: UST yields tumbled 3-6bps overnight as investors stayed cautious ahead of President-elect Trump’s inauguration and concerns surrounding UK and China, despite Fed’s Rosengren upbeat view that the pace of Fed rate hikes may turn “more regular”. While President-elect Trump may have soften some of his pre-election rhetoric, he appears to remain supportive towards some of his more unconventional policies relating to immigration and trade, likely to set a challenging start to his presidency with fierce Democrats’ opposition; stay neutral USTs. Elsewhere, GBP remains the big loser among G10 FX after PM May revealed that UK will not aim to preserve “bits of EU membership”, driving speculations of a “hard” Brexit, while a political crisis in Northern Ireland could raise the question of secession. We expect differing rhetorics to surface over early-driving volatility, supporting our mildly bearish GBP stance as EU politicians are likely to adopt a tough stance going into EU-UK negotiations.

¨   AxJ Markets: The CNH came under pressure again yesterday following last week’s dramatic surge, as easing overnight CNH rates may have spurred bearish speculators to pile back into shorts; foreign reserves print remained unsupportive of sentiment (Dec: USD3.01trn; Nov: 3.05trn), hovering marginally above of the USD3trn psychological level. 10y CGB yields also tightened c.3bps overnight after PBoC injected a net CNY70bn of liquidity into the system ahead of the Chinese festive holidays; stay neutral CGBs. In Malaysia, December foreign MGS ownership dipped further to 47.1%, the lowest since October 2015; outflows amounted to MYR16.1bn since November 2016. We remain neutral towards MGS at current levels over the near term amid lingering US rate hike expectations, while noting that yield spreads over OPR appear compelling and the highest since 2010.

¨   USDIDR was relatively unchanged overnight; Indonesia’s December foreign reserves rebounded to USD116.4bn (Nov: USD111.5bn), partially attributed to global bond issuances. Bank Indonesia continues to see room for further monetary accommodation, where we continue to pen in a 25bps rate cut over the coming months, although we think this is unlikely to materially weaken the currency; stay neutral IDR.