FW: RHB FIC Rates & FX Market Update - 5/9/17

 

 

 

5 September 2017

 

 

Rates & FX Market Update

 

 

Heightened Geopolitical Tensions Supportive of Safe Haven Assets

 

Highlights

 

¨   Global Markets: Movements across FX and Rates markets remained subdued overnight given US Labour Day holiday. GBP declined modestly against the EUR overnight as Brexit negotiation difficulties continue to weigh marginally on UK assets, with both sides unable to agree on financial settlements, given the political sensitiveness. UK is expected to seek continuous talks on the above until a breakthrough is reached, although an EU official hinted that the next round of talks may be delayed till end-September; we remain neutral GBP for now. Over in Japan, August services PMI came in softer than July's reading (51.6; July: 52.0), following the weaker manufacturing PMI due the week before, potentially threatening growth outlook into the final quarter of the year. JPY and JGBs continued to benefit from safe haven flows on escalating geopolitical tensions in the Korean peninsula, frustrating BoJ's efforts to re-inflate the economy; a neutral JPY stance remains appropriate at this junction.

¨   AxJ Markets: Both the USDCNY and USDCNH pair continued to trend downwards towards the 6.50 level, given poor USD sentiment and gradually stronger PBoC Yuan fixings. The strengthening CNY may discourage further large-scale capital outflows, allowing PBoC to remain committed towards deleveraging efforts, supporting a stable currency backdrop; remain neutral CNY and CNH. Indonesian headline CPI inched lower in August (3.82% y-o-y; consensus: 3.99%), firmly within the lower half of BI's 3-5% target range, raising the odds of another pre-emptive BI rate cut if growth trajectory remains subpar, although not our base case scenario. We eye marginally lower IndoGB yields over the coming months, although further DM tightening rhetoric and escalating geopolitical confrontations may weigh on EM sentiment and increases volatility; we stay neutral towards IndoGBs over the medium term.

¨   USDKRW climbed almost 1% overnight, the biggest AxJ mover under our coverage, after North Korea successfully tested a hydrogen bomb, escalating the already tense geopolitical situation. With UN reviewing prospects of further economic and trade sanctions, alongside the possibility of US-led military actions, expect economic data to remain under the radar over the near-term; we keep a mildly bearish view on the KRW over the medium term.