Modest Expectations for FFR Hike in March Limited Strength on USD

23 February 2017

Rates & FX Market Update

Modest Expectations for FFR Hike in March Limited Strength on USD

Highlights

¨   Global Markets: The intraday rally on USD post FOMC minutes release yesterday was decidedly weak as the tone from the FOMC minutes failed to reinforce the hawkish Fedspeak over the past weeks which placed March as a “live” meeting. USTs recorded small gains across the curve with FFR futures indicating a modest likelihood of FFR hike in March underscored by a modest risk of inflation perceived by members. We expect upward pressure on UST yields to remain limited by demand for safe haven stemming from EU political uncertainty alongside the unpredictability of US fiscal policy outlook; keep a neutral duration view on USTs. Politics overshadowed the strong German data and dominated market movements overnight, with the strengthening EUR attributed French Presidential Candidate Bayou withdrawal from the race and proposing an alliance with Presidential Candidate Macron to reduce Candidate Le Pen’s prospect of victory. Looking ahead, we remain biased towards a mildly bearish EUR stance over the coming months as ramifications from a Le Pen victory could pose a strong threat to the single currency bloc over the medium term.

¨   AxJ Markets: BoK’s decision to keep its benchmark policy rate at 1.25% this morning was within expectations, following the recent spate of stronger export demand. However, the tepid domestic economy alongside concerns on the sustainability of a strong export demand continue to buttress our view for another 12.5bps BoK rate cut over the coming months; position for a mildly bearish KRW, as narrowing policy rate differentials between Fed and BoK is likely to support a moderate climb on the USDKRW pair over the medium term.

¨   Malaysia’s foreign reserves remained unchanged at USD95bn, equivalent to 8.4 months of retained imports and 1.1x of short-term external debt, supporting MYR resilience overnight as the USDMYR pair held below the 4.46 resistance. Susceptibility to external gyrations alongside the steady climb in Malaysia’s CPI (Jan: 3.2%; Dec: 1.8%) continue to underpin a likely neutral BNM stance over the medium term; keep a neutral view on MYR as carry on MYR assets remain an attractive play within the AxJ bloc.