Developed AxJ: MAS retained its dovish rhetoric; geopolitical tensions surrounding North Korea spurred underperformance on KRW. Over in Singapore, while MAS kept the slope,

2 May 2017

Rates & FX Markets Monthly Review

Rising Geopolitical Tensions Fueled Risk Aversion Movements in April

Highlights

¨   US & UK: Increasing obstacles for President Trump to deliver on campaign promises weighed on USD. April ended with Donald Trump reaching the 100-day mark of his presidency. The performance of the markets in April were a reflection of the rising doubts over the President’s ability to deliver on its fiscal pledges illustrated by the DXY closing down by -1.30% m-o-m, while the international position of the Oval Office towards Syria, North Korea and Russia spurred a strong risk-off sentiment as the 10y UST yield closed at 2.28% below the former range support. Those movements cannot also be disassociated from the relatively weak economic data: 1Q17 stumbled worse than initially expected to 0.7% - the slowest first quarter over the past 3 years – combined with declining consumer spending (0.3% vs 3.5% 4Q16) - the most important US engine of growth - and a slowing labour market. Over in the UK, GBP surged 3.20% against the USD m-o-m after PM May called for a snap election to be held on June 8, potentially solidifying the government’s position into negotiations with the EU, with the new mandate allowing for policy continuity post-exit; significant upward move came amid record short GBP speculative positioning. Gilt yields fell in line with global rates movements, with key UK data pointing towards softening price and labour outlook.

¨   Eurozone: The French presidential election captured most of the headlines in April. In the first round, Centrist Emmanuel Macron and far-right nationalist Marine Le Pen took the lead, an expected result yet historical as for the first time in modern French political history both establishment parties were eliminated. The Euro surged to a five-month high on the results, closing below the key resistance at 1.0970/1.10; we continue to maintain a cautious tone until the final result (May 7^th) since surprises occurred last year and a Macron’s victory appears largely priced-in. On the ECB side, Mario Draghi gave no signs the Bank is ready to wind down its monetary stimulus despite acknowledging economic improvement as the balance of risks is still tilted to the downside.

¨   Japan & Australia: USDJPY tested but failed to break the 108.50 support. The USDJPY traded sideways in April (+0.09% m-o-m) at the rate of increasing/declining geopolitical tensions, in particular with the situation in North Korea. The JPY initially strengthened, testing our defined support at 108.50 before bouncing back just below the 89-day Exponential Moving Average resistance at 112.00 despite a weaker USD across the board; the later move attributed to easing tensions - in line with the pause observed on the safe haven Gold - and the continuation of monetary policy discrepancy as the BoJ delivered no surprises In April as the inflation target still remains far. AUD fell 1.85% against the USD despite the softer dollar backdrop, catalysed by: i) a more downbeat RBA towards the labour and housing markets; ii) 14.4% decline in iron ore prices m-o-m; iii) 1Q17 CPI missed consensus expectations. Amid a month of disappointment, March labour data came in relatively robust after weak February prints.

¨   Developed AxJ: MAS retained its dovish rhetoric; geopolitical tensions surrounding North Korea spurred underperformance on KRW. Over in Singapore, while MAS kept the slope, width, and mid-point unchanged in line with expectations, the central bank retained its dovish rhetoric which limited gains on SGD against the softer USD performance in April. Overall, the USDSGD held firm below the 1.40 handle as improving external demand helped to cushion downside risk from the lackluster domestic economy; yields on SGS treaded lower by 6-17bps m-o-m, buoyed by rising risk aversion amid heightening geopolitical tensions. Turning to South Korea, KRW recorded the weakest performance in Asia, depreciating by 1.72% m-o-m to 1,138/USD weighed by heightening geopolitical tensions surrounding North Korea alongside speculations of the incoming President’s stance towards THAAD deployment in South Korea. Meanwhile, 10y UST-KTB spread tightened by 11bps against the backdrop of higher 5y South Korea CDS, with yields on 10y KTB remaining elevated at 2.19%, unchanged m-o-m amid incremental concerns of downside risks from trade protectionism.

¨   Emerging AxJ: Foreign ownership of MGS continued to slide in March; incumbent Jakarta governor defeated in local elections. Yields on CGBs continued to surge higher by 19-33bps m-o-m as President Xi reinforced China’s drive to manage leverage ratios alongside PBoC tight rein on liquidity. Tightening liquidity is likely to continue driving interbank rates higher and exert further pressure on CGB yields over the near term. The USDCNY pair however, remained stable at the 6.90 handle m-o-m, guided by the PBoC CFETs fixing over the course of the month. In Malaysia, the Ringgit staged an impressive 1.91% gain against the USD m-o-m, with the USDMYR pair breaking below the 4.40 psychological level for the first time since November 2016, helped by the softening dollars and further tweaks in BNM’s FX rules. While MGS foreign ownership data due revealed that Malaysia suffered a significant outflow in March (38.5% of outstanding: Feb: 44.7%), better risk appetite sent 3y and 10y MGS yields down c.26bps and c.10bps m-o-m respectively, while upticks in foreign reserves may hint that foreign outflows have subsided in April. Elsewhere, the USDTHB pair hit its 20-month low of 34.21, before retracing higher to end the month at 34.59, with the THB declining by 0.69% m-o-m despite the softer USD movements. Movements on the ThaiGB curve was mixed, with underperformance skewed towards the longer end of the curve amid risk aversion within the AxJ bloc, overshadowing optimism from stronger Thai export data reported in April.. Lastly, the USDIDR pair was largely unchanged m-o-m, with the defeat of the incumbent Jakarta governor in the recent local election spurring concerns towards President Jokowi’s mandate. While the March CPI came in softer than expectations, a BI official hinted the possibility of rate hikes on any emergent risks; despite the above, 3y IndoGB yields fell c.17bps m-o-m.

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