17 March 2017
Rates & FX Market Update
BoE Dissent Vote Fueled Gains on GBP
Ahead of Article 50 Trigger
Highlights
¨ Global
Markets: While US economic data releases were mixed yesterday, FFR futures
indicated that probability for FFR hike in June increased from 50.2% to 53.5%,
prompting a retracement on UST yields, with the 10y climbing back to 2.54%
(+5bps). Keep a neutral duration stance on USTs over the coming weeks while
Congress debates on US President Trump’s federal budget, with steep cuts to
domestic departments likely to be challenged in Congress.
¨ AxJ
Markets: Singapore’s NODX surged by 21.5% y-o-y (Jan: 8.6%), with expansion
of NODX largely led by China, South Korea, and Taiwan. While the improving
external demand is likely to diminish MAS easing prospects in 2017, we prefer
to keep our mildly bearish stance on SGD as strong dependence on Chinese demand
fuels susceptibility to external gyrations; yields on SGS recorded gains,
mirroring post FOMC gains on USTs where we opine for the close correlation
between SGS and USTs movements to be sustained over the near term. PBoC raised
the 7-day, 14-day, and 28-day reverse repo rates by 10bps to 2.45%, 2.60%, and
2.75% yesterday, in tandem with FFR 25bps rate hike. Separately, PBoC has also
raised the 6-month and 1-year MLF rates by 10bps to 3.05% and 3.20%, its second
increase in 6 weeks, demonstrating its commitment towards mitigating excessive
credit growth as economic growth stabilises. While yields on CGBs remained
largely stable yesterday, downward pressure was evident on the USDCNY pair
which traded past the 6.90 support. We continue to position for a mildly
bearish CNY, with expectations for a 3-4% depreciation against USD this year,
but expect higher two-way volatility on the USDCNY pair over the coming year.
¨ BoE’s
decision to hold the Bank Rate at 0.25% was not unanimous, with outgoing BoE
member Forbes voting to increase the Bank Rate by 25bps given declining
tolerance for CPI to materially overshoot its 2% target (Jan: 1.8%). The
hawkish surprise supported strength on GBP overnight to 1.2358/USD (+0.55%),
even as the overhang of the imminent Article 50 trigger at the end of the month
continued to exert bearish pressure on GBP. While GBPUSD could seek to test its
1.21 support as formal Brexit negotiation materialises over the coming weeks,
declining propensity for a dovish BoE should limit extreme downward pressure on
GBP over the medium term.
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