USD and UST Yields Retraced from Session’s High Ahead of Labour Market Data Later This Week

4 January 2017

Rates & FX Market Update

USD and UST Yields Retraced from Session’s High Ahead of Labour Market Data Later This Week

Highlights

¨   Global Markets: While US ISM Manufacturing printed higher at 54.7 (Nov: 53.2), it failed to sustain the climb on DXY and UST yields as profit taking activities kept the DXY below its intraday high of 103.82 ahead of the highly anticipated NFP print due later this week. We prefer to maintain a cautious stance towards an overextended long USD positioning ahead of NFP and wage growth prints as investors continue to price in elevated expectations; maintain neutral view on USD. Over in UK, the outperforming manufacturing PMI failed to dampen the declining GBPUSD as concerns on Brexit and weaker consumer spending resulting from the weaker GBP continue to cloud UK’s economic growth prospect. Yields on GILTs mirrored movements on EGBs, climbing by 8-11bps yesterday as expectations for BoE to reduce rates remain faint; maintain neutral duration stance on GILTs.

¨   AxJ Markets: The latest manufacturing PMI prints from Singapore and China continue to ameliorate Asia’s near term growth outlook, with stronger new orders and new exports attributed to another modest expansion for Singapore’s PMI, spurring modest gains on SGD overnight against the strengthening USD; SGS curve steepened yesterday, with global inflationary concerns likely to be supportive of further curve steepening. Over in China, focus remains on the underlying inflationary pressures as Caixin manufacturing PMI jumped to 51.9 (Nov: 50.9), challenging PBoC’s neutral monetary stance over the medium term amid Chinese reforms; maintain a neutral stance on CGBs. Elsewhere, Indonesia’s CPI delved lower to 3.0% (Nov: 3.6%), providing BI policy room to reduce rates underpinned by the recent dismal PMI data and Indonesia’s decision to freeze fuel and electricity prices until March 2017, mitigating domestic inflationary pressures; remain constructive on IndoGBs, keeping a neutral duration tilt.

¨   Despite recording its strongest manufacturing PMI print since December 2015, the press release cited higher input prices as a deep concern for manufacturers amid the surging USDJPY. With diverging monetary policies between US and Japan likely to intensify over the medium term, we expect further weakness on JPY to crowd out some of the optimism as BoJ keeps true to its 2% CPI target.