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

 

5 September 2017

 

 

Rates & FX Market Weekly

 

 

US Congress Back in Session to Address Debt Ceiling

 

Highlights

 

Global Markets

¨   The US Congress returns from the summer recess with a heavy agenda including hurricane Harvey emergency spending, the debt ceiling negotiations which deadline could be pulled forward on additional hurricane spending, the FY2018 appropriation bills while the White House might focus on promoting the tax reform. Ahead of the FOMC meeting, Fed officials are expected to be constructive on the balance sheet reduction while they will probably diverge on the next rate hike with the odds of third rate 2017 hike remaining at about one in three. Expect US markets to take cues from the above and watch 92.00 on the DXY 2.10% for 10y UST as short term inflection levels.

¨   The upcoming ECB meeting is likely to be crucial for the EUR as the EURUSD pair tested our target and psychological 1.20 resistance last week. Although no major decision is expected, the balance of risks appears titled to the upside as (i) the QE forward guidance might change in views of our expectations of an announcement of APP modifications at the end of the year, (ii) growth forecasts could be revised higher, and (iii) a lack of comments on the EUR strength could push the pair to clearly break above 1.20.  However, stronger than expected downward inflation revision could limit the upside risks. Moving onto the UK, service PMI due is expected to soften marginally from July's print although remaining in expansionary territory, while July's Industrial Production growth is estimated to expand marginally m-o-m. While the above puts UK on a relatively reasonable growth trajectory, Brexit remains an overarching theme over the coming quarters, where recent news flow seems to suggest rising difficulties over negotiations; stay neutral on GBP over the near term.

¨   Risk sentiment should remain the main USDJPY driver as it dropped close to 108 on further escalation in the North Korean peninsula. In the absence of strong onshore catalyst and positive US political and geopolitical developments, the USDJPY is expected to hold below 111 while a break below 108 would confirm further drop to 106.50. Over in Australia, RBA is expected to kick-start the week's economic events, with any stronger rhetoric against the strengthening AUD likely to keep the AUDUSD pair below the 0.80 psychological level. However, the hurdle towards either a rate hike or cut remains high in our view, where we expect the Bank to hold its monetary policy over the coming months. 2Q17 GDP is expected to improve marginally (consensus: 1.8% y-o-y), although growth on an absolute basis remains sub-optimal. The week then ends off with July retail sales, which is likely to have a moderate swing effect on the AUD on any surprises; we reiterate our neutral AUD stance at this juncture.

 

 

AxJ Markets

¨   Response to North Korea's hydrogen bomb test are likely to be the focus of the region in the week ahead, with US reviewing its military options as well as the prospect of further economic sanctions on North Korea and its benefactors. As such, expect South Korea's strong current account balance data to be overshadowed, where our preference remains for a cautious stance on KRW assets over the medium term; keep a mildly bearish view on KRW.

¨   Meanwhile, heavy economic calendar in China in the week ahead, with Caixin PMI, trade and foreign reserves likely to remain supportive of China's stabilising economic outlook, reinforcing PBoC's resolve towards deleveraging. While speculations of possible sanctions on China resurfaced post North Korea's hydrogen bomb test, downward pressure on the USDCNY pair may persist over the near term amid declining domestic liquidity, keep USDCNY near its 6.60 resistance over the near term; keep a neutral duration view on CGBs.

¨   Elsewhere, Singapore is scheduled to release the PMI prints in the week ahead, where the continued expansion is likely to further bolster sentiment towards a strengthening economy, but unlikely to be a key catalyst to sway MAS likely status quo decision in October. As such, we opine for gains on SGD vs regional currencies to remain limited, maintaining our neutral view on SGD; improving domestic loans data likely to keep spreads between SGS and UST tight. With no key data expected out of Thailand, we expect ThaiGBs to trade alongside regional bond markets, with easing risk aversion likely to keep yields on short dated ThaiGBs anchored; declining tolerance for THB's outperformance could also dampen THB's strength, keeping the USDTHB pair firmly above the 33.0 support over the near term.

¨   Expect a relatively busy week in Malaysia after a long stretch of holidays, with trade and foreign reserves data due likely to show improvements. BNM's bi-monthly meeting wraps up the week, where we expect no change to the headline OPR, though we watch BNM's rhetoric given strong GDP growth amid volatile global economic and geopolitical conditions; stay neutral MGS over the coming weeks. Lastly in Indonesia, foreign reserves due late-week are likely to remain at all-time highs, with combined equity and bond flows marginally in positive territory over the month of August, as investors continue to seek higher returns from EM carry currencies. BI's late-August surprise rate cut should support IndoGBs over the coming weeks, given that G3 central banks are unlikely to deliver surprises in our view, although we remain cautious in chasing the rally substantially further at this juncture; stay neutral IndoGBs.

  

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