Strong AxJ FX Rally At the Expense of the Dollar

5 June 2017

Rates & FX Markets Monthly Review

Strong AxJ FX Rally At the Expense of the Dollar

Highlights

¨   US & UK: US political risk hurt the Dollar. The US Dollar and 10y US Treasury yield declined again for a third consecutive month, -2.15% and -7.7bps respectively, as a combination of escalating political trouble arising for the Trump presidency and disappointing economic data. The FOMC May meeting minutes revealed that the committee remains comfortable to increase the interest rate benchmark in June dismissing the recent economic weakness (FFR Future implied probability of a June rate hike was at c.90% at the end of May). Over in the UK, GBP dipped c.0.5% against the USD m-o-m despite broad weakness seen in major USD crosses, after late-May polls revealed that the Conservatives’ lead over Labour tightened to single-digit from c.15-25% previously. BoE held the Bank Rate steady at 0.25% in its May meeting with a 7-1 majority decision, disappointing some hawkish observers that predicted more dissenters, given steady economic trajectory and rising price pressures; April CPI printed higher than expected (2.7% y-o-y; consensus: 2.6%).

¨   Eurozone: While political risk eased in Europe. Emmanuel Macron won the French presidential election confirming that after the Netherlands another founding member of the Union rejected the populist far-right ideology. The result bolstered the allure of the European currency - the EUR rallied by 3.20% against the USD and other major currencies – and bolstered risk sentiment with both core and peripherals government bonds posting strong gains in May despite the resurgence of the Greek-debt crisis and Mario Draghi’s comments supportive of the continuation of the ECB’s accommodative monetary policies.

¨   Japan & Australia: Australian Dollar under pressure. Global geopolitical tensions somehow eased in May yet the JPY strengthened against the USD by 0.64% since political turmoil in the US continued to hammer then allure of the greenback especially against safer currency. Despite positive performances observed for other DM government bonds, JGB yields inched higher in May but remain contained in a tight range. In Australia, while ACGB yields broadly tracked global yields lower m-o-m, AUDUSD dipped 0.77% m-o-m in contrast with the weaker dollar backdrop over the month of May. The continued sell-down in iron ore coupled with negative Chinese news flow weighed on the currency, as net long speculators were probably forced to unwind their position as the AUD underperformed. RBA minutes signalled little appetite for any shifts in monetary policies over the near term.

¨   Developed AxJ: Post election optimism in South Korea fueled strong gains on KRW. Over in South Korea, KRW emerged as the second best AxJ FX performer in May, appreciating by 1.58% m-o-m to 1,119.7/USD. The strong performance in KRW was buoyed by improving political sentiment following President Moon’s electoral victory, amid the prospect of a large fiscal stimulus this year alongside President Moon’s pledge to create more jobs. Additionally, concerns over probable accusations of being a currency manipulator by US also prompted South Korean authorities to explore ways to reduce its massive current account surplus further underscoring KRW strength in May. KTB curve bear steepened m-o-m, with yields on 10y climbing to its intra-month high of 2.31% before retracing to 2.23% at the end of May, as the expectations for fiscal stimulus cemented BoK’s neutral monetary policy inclination amid financial stability concerns. Turning to Singapore, the weak NODX print seen for the month of April failed to dent strength on SGD in May, with the USDSGD pair breaking below the 1.40 handle towards 1.3832 (-0.99% m-o-m). Gains on SGS remained concentrated on the middle of the curve, with SGS continuing to take directional cues from the USTs.

¨   Emerging AxJ: Moody downgraded China’s sovereign rating to A1; S&P upgraded Indonesia’s sovereign rating to BBB-. In China, the month of May was dominated by the announcement of the Hong Kong Bond Connect and the addition of a counter cyclical adjustment factor in the PBoC daily Yuan fixing, where the former is perceived to be positive for CNY as easier offshore access to China’s bond market could further underscore the case for CGB’s inclusion into major Asian indices and support demand for CNY over the medium to longer term. USDCNY and USDCNH delved lower to 6.8180 (-1.10% m-o-m) and 6.7462 (-2.21% m-o-m) respectively; steady economic outlook continued to keep China’s deleveraging efforts intact, supporting a moderate climb in CGB yields. Meanwhile, strong inflows into the Thai bond market fueled tenacious gains on THB, with the USDTHB pair declining to 34.040 (-1.59% m-o-m), against the backdrop of of stable inflation outlook, strong economic outlook, and neutral monetary policy stance; yields on 10y ThaiGB yields fell 9bps m-o-m to 2.63%. Over in Malaysia, 10y MGS yields and the USDMYR fell c.16bps and 1.38% m-o-m respectively, underpinned by improving sentiment and foreign inflows; foreign reserves improved by USD1.2bn over the first half of May. Economic data released over the month were healthy, with the first expansionary PMI print in 26 months, strong trade and GDP growth (1Q17: 5.6% y-o-y), and a CPI print largely within official and market expectations (Apr: 4.4% y-o-y). Last but not least, S&P finally upgraded Indonesia’s sovereign rating to BBB- with stable outlook, completing the trinity of investment-grade rating from all 3 major global rating agencies. Relatively muted market reaction reflected investors’ already-high hopes for an eventual upgrade, with May bond inflows (c.USD636m) lower than the preceding 2 months. 1Q17 GDP print came in marginally disappointing at 5.01% y-o-y, against consensus of 5.10%, although the government remained confident in Indonesia’s economic trajectory, and revised the 2017 GDP growth target to 5.3% (previous: 5.1%).

This message is intended only for the use of the person(s) to whom it is addressed and may contain information that is privileged or otherwise protected from disclosure. If you are not the intended recipient you are hereby notified that any use, review, disclosure or copying of this message and the information it contains is prohibited. If you receive the message in error, please notify the sender by reply e-mail and discard all its contents.   Thank You.