25 May 2017
Rates & FX Market Update
Fed’s Gradual Balance Sheet
Normalization Plan Well Received
Highlights
¨ Global
Markets: The key takeaways from FOMC May meeting minutes were the high
likelihood of a June FFR hike, along with a very gradual approach in which Fed
would be normalising the balance sheet which would indicates the feasibility
for FOMC to continue raising the FFR concurrently, should the recent economic
slowdown prove to be transitory. The proposed approach would require the
Committee to announce a set of caps on the amount for bonds that would be
allowed to run off, with a revision on the caps set every 3 months. Barring
large revisions to inflation outlook, we recommend for investors to continue positioning
for a flatter UST curve, with FOMC’s gradual approach well received by
investors; keep a neutral view on USTs.
¨ AxJ
Markets: BoK’s decision to hold rates at 1.25% remains within consensus
expectations, underpinned by the prospect of 2H17 fiscal stimulus alongside the
constrain from elevated household debt burden. Muted movements were seen on
KTBs, where investors continue to await President Moon’s plans for fiscal
stimulus, and its corresponding plans to fund looser fiscal budgets, which
may pressure the longer end of the KTB curve as the new administration
deviates from the comparatively tight fiscal budgets seen during the Park
administration; keep a neutral duration view on KTBs over the near term. Singapore’s
1Q final GDP climbed to 2.7% y-o-y (previous estimate: 2.5%), bolstered by
strong manufacturing growth. Lingering uncertainties stemming from rising trade
protectionism alongside the likelihood for monetary tightening in China
continue to underpin MTI’s decision to keep its full year GDP forecast between
1.0-3.0%, which could signal the prospect for MAS to maintain its current
accommodative SGD NEER framework in the upcoming October meeting. SGD appreciated
by 0.34% to 1.3846/USD yesterday, where we expect further appreciation on
SGD vs regional peers to remain limited over the medium term as investors
position for a status quo MAS decision.
¨ With
strong government fiscal spending alongside improving exports supporting the
Thai economy, BoT held rates at 1.50% yesterday, sustaining monetary
accommodation amid risks of rising protectionism. BoT governor also highlighted
the risk of yield seeking behaviour as Fed continues to raise the FFR, which limits
our appetite for THB despite the improving economic outlook; USDTHB inched
lower to 34.342 (-0.26%) yesterday on the back of softer USD movements, where
we prefer to maintain a neutral view on THB.
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