FW: RHB FIC Rates & FX Market Weekly - 18/9/17

 

 

18 September 2017

 

 

Rates & FX Market Weekly

 

 

Fed's Balance Sheet Strategy to Take Global Spotlight

 

 

Highlights

 

Global Markets

¨   The Fed reconvenes and while the benchmark interest rate is expected to be kept unchanged, focus will shift to the likely announcement of the start of operations to reduce the central bank's USD 4.5 trillion balance sheet. Should the plan proposed in June remains (stop reinvesting the proceeds of maturing securities at small monthly caps), it should "run quietly in the background" according to Janet Yellen. However, entering unchartered policy territory could bring further uncertainties to the markets with Fed officials consequently opting for slower rate hikes to provide a buffer. The geopolitical factor is also likely to remain in play with Donald Trump addressing the UN for the first time amid the backdrop of heightening tensions in the Korean peninsula; remain neutral USD and UST.

¨   In Germany, Angela Merkel is anticipated to win the general election heading to a fourth term in office. Although the inherent election risk appears low, for the first time since WWII, six parties are expected to enter the Bundestag including the extreme right AfD which could limit Merkel's room for manoeuvre in the future. On the economic front, we will eye the PMI due in the week ahead, expected to underpin the ongoing economic recovery; maintain a mildly bullish EUR view.

¨   The Bank Of Japan is expected to stand pat, keeping the policy rate unchanged and the QQE running for as long as it takes to reach the 2% inflation target with positive catalysts at play such as above potential growth and a tight labour market. That said, the currency remains vulnerable to global factors such as geopolitical tensions and as a result of a better global risk sentiment the USDJPY pair pushed above the 111 jeopardizing our view for a further drop in the short term; remain neutral JPY. Lastly, RBA minutes for the September meeting will be closely scrutinized for any hints of stimulus withdrawal over the coming months, given continued strengthening in the labour markets and rising hawkish voices among DM central banks. We eye comments on labour conditions, wage growth and household debt, areas that RBA is keeping a close watch on amid record-low Australian rates; stay neutral AUD.

 

AxJ Markets

¨   Singapore begins the week with the release of its August NODX and Electronics Export print, where we expect strong double digit expansions to continue to keep SGD NEER firmly in the upper bound of the MAS policy band despite slim prospects of tightening in October; undermining excessive strength on SGD vs regional currencies. Meanwhile, South Korea will provide a glimpse of its trade performance in September, with outperformance likely to remain overshadowed by the overhanging geopolitical woes with North Korea. We retain our cautious view towards KRW assets, preferring to keep a mild underweight duration view on KTBs over the medium term.

¨   Elsewhere in China, we expect PBoC is likely to maintain its neutral to tightening position in the OMO, with the quiet economic calendar likely to spur investors towards global events, with FOMC scheduled in the week ahead. We expect the USDCNY pair to take directional cues from USD in the week ahead, with declining tolerance on further appreciation on CNY given its impact on trade competitiveness fuelling our bias for a neutral view on CNY over the medium term. Turning to Thailand, we see a generally quiet economic calendar, with customs trade data due at the end of the week. While the robust external surpluses could boost the attractiveness of THB over the medium term, we expect BoT's preference for a neutral THB performance vs regional currencies to increasingly limit THB gains over the medium term, underscoring our neutral view on THB.

¨   Onto Malaysia, August CPI due in the week ahead is expected to soften further from the July print amid waning pressures from fuel prices, offering BNM some room for comfort to hold monetary policies over the coming months. Headline foreign reserves print may extend its gains given the weak USD, maintaining investors' recent confidence towards Malaysian assets; stay neutral MYR at current levels. Over in Indonesia, we do not expect BI to deliver any headline surprises after the off-consensus rate cut last month. While overall broad rhetoric is expected to remain consistent with the previous monetary statement, concerns over the recent market volatility could surface amid wild USD movements and rising geopolitical tensions; expect a stable USDIDR over the coming weeks, although we keep a cautious watch over global risk sentiment with potential EM-wide implications.

  

Weekly Positioning

 

	Rates	FX
Overweight
Mild Overweight		EUR
Neutral	UST, GILT, Core EGBs, ACGB, SGS, CGB, MGS, IndoGB	USD, GBP, AUD, JPY, MYR, THB, SGD, IDR, CNY
Mild Underweight	KTB, ThaiGB	KRW
Underweight	JGB

 

 

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