AxJ Markets: South Korean current account surplus narrowed significantly to USD5.9bn (Feb: USD8.4bn), underpinned by lower trade surplus alongside wider services account deficit, likely due to changes in Chinese tourism policy following deployment of Thaad. With South Korean authorities exploring ways to reduce its massive current account surplus to avoid accusations of being a currency manipulator by US, we expect upward pressure on the USDKRW pair to persist over the medium term, underscoring our mildly bearish view on KRW.

4 May 2017

Rates & FX Market Update

FOMC Downplayed Softer Data, Signaling Prospects of June FFR Hike

Highlights

¨   Global Markets: While FOMC provided little hints signalling its FFR hike schedule, probability of a June FFR hike indicated by FFR Futures soared to 90.0% from 67.1% seen the day before, bolstering upward climb on UST yields and USD overnight. The FOMC statement indicated that the committee downplayed the significance from the softer non-farm payroll and 1Q GDP print, suggesting that weakness is likely to be transitory. Pressure on UST yields to tread higher remains, with FOMC increasingly turning towards the broad economic growth progression, rather than relying on single economic data points to guide their policy decisions; keep a neutral duration tilt on USTs. The French Presidential debate held yesterday overshadowed Eurozone’s 1Q advanced GDP data, which printed in line with consensus expectation (1Q: 1.7% y-o-y; 4Q: 1.8%). Polls conducted after the debate showed that respondents rated Macron as the winner with 63% favouring the centrist candidate while 34% picked Le Pen. Candidate Le Pen continued to put forth her Nationalist views, with policies geared towards border restrictions to protect France from foreign competition and terrorism, on top of an exit from Euro. EUR remained relatively stable yesterday at the 1.089/USD handle, with Macron remaining the favourite to win the Presidential Election over the weekend; prefer to keep a cautious EUR stance.

¨   AxJ Markets: South Korean current account surplus narrowed significantly to USD5.9bn (Feb: USD8.4bn), underpinned by lower trade surplus alongside wider services account deficit, likely due to changes in Chinese tourism policy following deployment of Thaad. With South Korean authorities exploring ways to reduce its massive current account surplus to avoid accusations of being a currency manipulator by US, we expect upward pressure on the USDKRW pair to persist over the medium term, underscoring our mildly bearish view on KRW.

¨   AUDUSD recorded its sharpest fall since November, declining by 1.45% yesterday to 0.7425, pressured by weaker commodity prices alongside stronger appetite for USD overnight. Given the high likelihood for RBA to maintain its neutral inclination over 2H17 as the central bank remains watchful of the labour market, we prefer to keep a neutral stance on AUD, with expectations for the AUDUSD pair to take directional cues from commodity prices over the near term.

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