FW: RHB FIC Rates & FX Market Update - 14/12/17

 

 

 

14 December 2017

 

 

Rates & FX Market Update

 

 

Dovish Dissents Sent USTs Higher

 

Highlights

 

¨   Global Markets: Fed officials followed through on an expected third rate hike for 2017 justified by a growing economy and a strong labour market. As we expected, both USD (-0.68%) and UST yields (c.5/6bps) dropped post-decision. While growth projections were revised higher until 2020, FOMC still expected core inflation to concurrently run below its 2% target. Overall, the policy outlook is unchanged as the dot plot still reflects three more rate hikes for 2018. Although Jerome Powell should bring policy continuity, the dissensions within FOMC (two members voted to leave rate at 1.25%) and the weak price pressure could force the Fed to adopt a discretionary/data dependent approach. Looking forward, political risk will remain key as the Republicans now hold a razor thin majority in the Senate, as Dem. Jones won Alabama, potentially jeopardising GOP's agenda while impact of anticipated reforms are still being debated. We turn mildly bearish USD and remain neutral UST. Over in Australia, the AUDUSD pair surged more than 1% overnight amid the strong consumer confidence alongside the weaker dollar backdrop. The pair further extended gains this morning (+c.0.4%) after the economy added 61.6k jobs in November (consensus: 19k); unemployment rate remained steady after participation rate went up 0.4ppt. However, RBA is likely to remain concerned over the housing and domestic-oriented sectors; we opine for RBA to hold off raising rates over the coming months, and stay neutral towards the AUD.

¨   AxJ Markets: Over in Malaysia, PM Najib revealed that the nation is on track to achieve the 3% budget deficit target, with authorities remaining committed towards further consolidation efforts; a neutral MGS stance over 2018 remains appropriate.

¨   In the UK, PM May was inflicted a serious defeat by conservatives Brexit rebels voting against her Brexit law. The bill was changed in order to guarantee that Parliament will get a final vote on the final deal at the end of negotiations. Political risk is thus also key in the UK as Brexit remains UK's sword of Damocles. Too much Brexit optimism has been priced in by complacent FX markets. However as illustrated by yesterday's price action, the GBPUSD should remain in check over the short/medium term as the Dollar stays soft; remain neutral GBP.

 

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