FW: RHB FIC Rates & FX Monthly Review - 5/9/17

 

5 September 2017

 

 

Rates & FX Markets Monthly Review

 

 

Geopolitical Tensions Drove Key Rates & FX Movements in August

 

Highlights

 

¨   US & UK: The US dollar fell for the sixth consecutive month. While August is traditionally quiet month (i) the political confusion prevailing in Washington, (ii) alongside soft inflation print continuingly missing expectations, and (iii) consequently the lack of hawkish support from the Fed pushed the DXY to record a -0.21% monthly drop. Geopolitical tensions on another hand supported USTs across the curve, despite the issue pertaining to the debt ceiling negotiations which pushed money market yields higher; UST fell -2.4 / -17.7 bps on 2y/10y tenors. Over in the UK, Gilt yields broadly tracked global rates lower m-o-m, with the August BoE meeting delivered no surprises to investors, maintaining the Bank Rate at 0.25% in a 6-2 decision. Robust labour data failed to buoy the GBP, with the cable down more than 2% m-o-m, hurt by: i) renewed Brexit concerns as difficulties surfaced during negotiations; ii) lower CPI print (July: 2.6% y-o-y; consensus: 2.7%); iii) slower retail sales growth; and iv) stronger EUR sentiment.

¨   Eurozone: The EURUSD extended its rally. The pair tested the 1.20 resistance, before closing marginally lower than this psychological level. Market expectations of a QE tapering starting in 2018 alongside limited concerns voiced by Mario Draghi and other ECB officials over the current currency strength were the main catalysts behind the bullish move. In a flight-to-quality caused by the rising tensions in the North Korean Peninsula, European Government Bonds registered positive performances tracking their peers while the 10y Spanish bond yield rose by 7.1bps m-o-m following the terrorist attacks in Catalonia.

¨   Japan & Australia: RBA reiterated its neutral policy stance, defying hawkish speculations. The USDJPY fluctuated within the 108/111 range accordingly to the news flow linked to the warlike situation caused by the North Korean regime engaged in a war of words with the US President while defying the international community with ballistic missiles tests. Tracking global yields, JGB yields drifted lower with the 10y yield edging closer to the 0% level. Moving on to Australia, 2y and 10y ACGB yields are 4-10bps higher m-o-m despite the lack of hawkish validation from the RBA, weighed down by AUDUSD's poor performance (-0.70% m-o-m). The central bank warned that the stronger currency will hurt Australia's outlook and makes the 2% inflation target more elusive, and have clearly signalled that they are not following the footsteps of other major central banks, given that domestic rates remain one of the highest among DM economies. Strong employment numbers and the persistent iron ore bull market helped limit losses in the AUDUSD pair, after failing to break above the 0.80 level convincingly.

¨   Developed AxJ: South Korean geopolitical tensions drove risk sentiment, overshadowing domestic developments. Spreads between SGS and UST tightened to its 6-months low, with 10y SGS yields briefly trading on par with 10y UST, before retracing back to -3bps by the end of August. Tightening domestic liquidity as a result of improving outlook for domestic loan demand continued to spur the tightening spreads between SGS and UST, with bouts of widening spreads providing opportunities for investors to overweight UST vs SGS. Movements on SGD however, remained lackluster with the USDSGD pair consolidating below the 1.36 resistance; SGD underperformed its AxJ peers with the exception of KRW as prospect of MAS tightening remained slim over the coming month. Meanwhile, South Korea's geopolitical tensions remained in the spotlight for the month of August, with North Korean missile tests coupled with US-South Korea military drills fueling bouts of risk aversion with USDKRW overshooting to 1,150 before retracing to end the month at 1,128 (+0.74% m-o-m). Domestically, President Moon's proposal for tax hikes on large corporations and high income earners remained a positive for the medium term economic outlook, but remained largely overshadowed by the ongoing geopolitical woes; yields on KTBs rose 3-5bps m-o-m amid declining appetite for KRW assets.

¨   Emerging AxJ: BI surprised with a 25bps rate cut to boost growth; another month of outperformance from CNY. Elsewhere, stabilizing economic outlook in China remained supportive of PBoC's deleveraging efforts, with PBoC's fairly selective participation in the OMO continuing to drain liquidity from the domestic market and driving strong gains on CNY. USDCNY broke the 6.60 support convincingly to end the month at 6.5901 (-2.03% m-o-m), where we expect the strong rise in foreign reserves alongside healthy trade data and manageable CPI likely to keep the USDCNY pair below the major resistance at 6.70 over the medium term. Unsurprisingly, yields on CGBs continued to climb higher by 4-7bps m-o-m across the curve, but remains likely to be mitigated by gradual rise in demand for CGBs ahead of the official inclusion in regional bond indices next year. Turning to Thailand, the steep appreciation on THB this year vs regional currencies has compelled BoT's governor to voice his declining tolerance towards the THB's relative outperformance, citing its impact on domestic business and financial stability risks. Volatility on THB remained low, with the USDTHB pair consolidating firmly above the 33.0 support over the course of August while declining BoT bill supply continued to pressure yields lower on the short end of the ThaiGB curve. Over in Malaysia, 3y yields climbed c.4bps m-o-m as the benchmark security switched to a higher duration paper, while 10y yields fell c.10bps over the same period, in line with flatter curves globally. While foreign investors remained cautious in July, August saw foreign reserves climbing above USD100bn, underpinned by a robust 2Q17 GDP print (5.8% y-o-y; consensus: 5.4%) and manageable inflation (3.2% y-o-y; consensus: 3.4%). USDMYR dipped marginally m-o-m, although volatility remained at subdued levels. Lastly in Indonesia, the IndoGB curve bull steepened after BI delivered a surprise 25bps rate cut, sending 3y yields c.50bps lower m-o-m; BI cited manageable inflation (July: 3.88% y-o-y) and lower external risks attributing to the gradual pace of Fed tightening. 2Q17 GDP growth at 5% reinforced Indonesia's relatively stable growth trajectory, although slightly below the 5.1% consensus estimate, while foreign reserves levels climbed to an all-time high of USD127.8bn that could help bolster the country's external defenses. Last but not least, the government reaffirmed their continued commitment towards fiscal consolidation, pinning the 2018 budget deficit target at 2.19% of GDP, although some parliamentary members raised doubts towards the plan, criticising it as overly-optimistic.