ECB Reluctant to Shift Up the Hawkish Gear

7 April 2017

Rates & FX Market Update

ECB Reluctant to Shift Up the Hawkish Gear

Highlights

¨   Global Markets: UST and DXY movements were subdued overnight as US President Trump met with China President Xi, the first face-to-face meeting between the 2 economic superpowers since Trump’s electoral victory. While we do not expect any major surprises to surface from their first summit amid an important year for President Xi, global investors could remain keen on any developments on trade or geopolitics; we maintain our neutral stance towards both the USTs and the US Dollar. ECB meeting minutes suggested that while some governing council members pushed for a more upbeat tone, others argued that a shift in forward guidance could tighten financial conditions. Furthermore, ECB’s Draghi remark that “a reassessment of the current monetary stance is not warranted” dominated European movements overnight, with EURUSD declining 0.24% overnight as the ECB remains reluctant to turn hawkish on the Eurozone outlook; we stay mild overweight Bunds versus the rest of EU papers.

¨   AxJ Markets: China’s Caixin services PMI dipped to 52.2 in March (Feb: 52.6), compounding on the weak manufacturing print, and in contrast with the official PMI gauges. We continue to eye broad stability in the Chinese markets over 2017 given the upcoming leadership transition as President Xi looks to solidify his legacy, with the CNY only likely to inch mildly higher from current levels; stay mildly bearish CNY over the medium term. Malaysian 2^nd Finance Minister Johari pointed out that no further measures are necessary to maintain MYR stability, as the USDMYR remains within the 4.40-4.50 range since December 2016. We continue to eye gradual improvements in sentiment as investors acclimatised to the new FX regime; stay neutral MYR, with USDMYR likely to average 4.35 in 4Q17.

¨   USDKRW edged 0.80% higher overnight even as movements in other AxJ currencies appear subdued, driven by rising risk aversion, geopolitical woes and JPY strength. The upcoming South Korean presidential race tightened as Ahn’s support caught up with frontrunner Moon; stay mildly bearish towards the KRW as the country remains heavily exposed to China.

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