19 April 2017
Rates & FX Market Update
UK Snap Election Set to Bolster
Conservatives’ Majority in Parliament
Highlights
¨ Global
Markets: USTs staged another strong rally overnight, with 2y and 10y yields
declining c.4-8bps after reports that Pentagon is considering shooting down any
North Korean missile launches, amid softening expectations that President Trump
will deliver much-needed tax reforms within a reasonable timeframe given the
geopolitical situation. We expect the USD to face near-term downward
pressure as investors actively reconsider the reflation theme, till market
attention shifts towards the June FOMC meeting, which may then offer some
reprieve to the dollar; stay neutral USD. PM May called for a snap
election on June 8, which sent the GBPUSD 2.21% higher overnight, given that
the results are likely to strengthen UK’s hand heading into Brexit
negotiations. With polls indicating a comfortable c.20-point lead for the
conservatives (against Labour), PM May is likely to boost her party’s majority
in Parliament, although the uncertainties surrounding an eventual Brexit
lingers on. We are more comfortable with a neutral GBP stance over the near
term, but stay cautious over the longer term, with formal negotiations
likely to kick off after the German elections in September.
¨ AxJ
Markets: IMF raised its 2017 global outlook, upgrading its world growth
forecast to 3.5% (previous: 3.4%), driven by stronger manufacturing and trade
activities; Europe, UK, Japan and China saw its growth forecasts upgraded as
well. This bodes well for most AxJ economies, especially given relative
stability in Chinese economic trajectory; we are largely neutral towards
currencies of trading powerhouses in the AxJ region (SGD, MYR, THB), though we
retain our mildly bearish tilt towards the KRW and CNY.
¨ AUDUSD
fell 0.41% overnight despite the softer DXY, impacted by sharp declines in iron
ore prices (c.-32% since mid-March). RBA minutes due affirmed the bank’s
concerns over the Australian labour and housing markets, creating a monetary
policy dilemma given the different policy responses required. We think RBA
will likely stay on hold over the coming months as the bank closely monitor
the developments, with our base case remaining for RBA to stand pat at 1.50%
over 2017, although a mild dovish re-pricing in Australian rates may be
on the cards; stay neutral AUD.
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