17 April 2017
Rates & FX Market Weekly
French Election: Potential for
Another Major Upset in Global Markets
Highlights
Global Markets
¨ Last
week, we mentioned that a break below 2.30% would trigger the 10y UST yield to
reach 2.20%. Since this level has been reached, further gains towards 2.08%
could be seen should the ongoing geopolitical concerns in Syria and North Korea
remain in focus when US VP Pence travels to Asia-Pacific including South Korea
and Japan. We will nonetheless scrutinize various Fedspeaks in order to gauge
Fed’s forward guidance alongside April Markit PMI Manufacturing although any
linked-effect could be muted should world tensions persist; remain neutral USD
and UST.
¨ Elsewhere,
expect a relatively quiet week ahead in the UK due to the Easter holidays with
only Retail Sales due, which is expected to soften marginally from the February
print. A weak reading will likely compound on the string of mixed data due
month-to-date, as UK prepares to begin formal negotiations with the EU over the
future of their relationship; we stay mildly bearish towards the GBP, with
hardline stances adopted by both sides likely to fuel uncertainties over the
negotiations. The first round of the French Presidential elections will be
held on Sunday 23rd. At this juncture, given the margin errors of
opinion polls, it has become a four-way race where only 2 candidates - among
centrist Macron, far-right Le Pen, leftist Mélenchon and Republican Fillon -
can reach the second round (7th May). While the uncertainty
with regards to the first round results increases, it also indicates the strong
dislocation of the French political landscape. As such, it could translate to
an unusual follow-through on the June Legislative elections when the elected
President might not be able to form a majority. Expect lingering uncertainties
to weight on the Euro and widen OAT/Bund spread.
¨ Caused
by increasing geopolitical risk events, the safe-haven JPY is already close to
our next defined support at 108.50 against the USD. In the absence of strong
onshore catalysts, the JPY strength is likely to continue while a conflict in
North Korea could limit its amplitude due to the countries proximity. We eye
the next support at 106.50 for the USDJPY. Over in Australia, RBA minutes due
in the week ahead may offer greater insights to the April policy decision
statement, where investors perceived them to be more dovish than previous
statements. The strong March jobs data may not fully alleviate lingering
concerns, with RBA likely to err on the side of caution until clear signs of
a recovering labour market emerge; stay neutral AUD.
AxJ Markets
¨ Over
in Asia, the Chinese 1Q GDP will garner some attention, with a strong print
(consensus expectations: 6.8%) likely to bolster expectations for PBoC to
further its deleveraging agenda this year, which could further exceed upward
pressure on CGB yields. Meanwhile, no surprises are expected from China’s
retail sales and IP data, which are also due in the week ahead. Elsewhere,
South Korea releases a glimpse of April’s trade data, where the strong export
growth is likely to be overshadowed by further spotlight onto the North Korean
geopolitical tensions, weighing on KRW vis-à-vis regional peers.
¨ Turning
to Singapore, robust NODX expansion in March could underscore strength on SGD
over the near term, but unlikely to douse concerns of a diverging externally
oriented and domestic industries. We reiterate our view for a tightening MAS
monetary policy to be premature, and prefer to keep a neutral duration view on
SGS over the medium term.
¨ Over
in Malaysia, March CPI is expected to tick higher from the 4.5% logged in
February, partially impacted by the low base in 2016. Foreign reserves data due
later in the week may shed insights over April’s cross-border flows, although
unlikely to substantially change the MYR’s dynamics over the near-term; stay
neutral MYR. Last but not least, BI is likely to remain cautious and
prudent amid elevated external risks, where we eye a status quo monetary
decision when the bank reconvenes on 20 April. With USDIDR breaking below the
13,300 psychological support decisively, and reaching a new low since the US
election, we remain optimistic that the IDR can deliver decent post-carry
return over the year, amid BI’s preference for a stable and conducive currency.
¨ Although
it is likely to be a quiet week in Thailand, we expect strong demand for the 5y
ThaiGB auction scheduled on 19 April, particularly amongst offshore investors
given the allure of resilient THB; keep a mild underweight duration on ThaiGBs.
Weekly Positioning
|
Rates
|
FX
|
Overweight
|
|
|
Mild Overweight
|
Core EGB
|
USD
|
Neutral
|
UST, GILT, ACGB, SGS,
CGB, MGS, IndoGB
|
AUD, JPY, MYR, THB,
SGD, IDR
|
Mild Underweight
|
KTB, ThaiGB
|
EUR, KRW, CNY, GBP
|
Underweight
|
JGB
|
|
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