FW: RHB FIC Rates & FX Market Update - 26/1/18

 

 

26 January 2018

 

 

Rates & FX Market Update

 

 

EUR Bulls Cheered ECB’s Optimistic Economic Trajectory

 

Highlights

 

¨   Global Markets: The EURUSD hit our target at 1.2500 after ECB President Mario Draghi painted a positive economic picture as data pointed to “solid and broad” growth with inflation to move higher on combination of both internal and external factors although acknowledging the concerns over the Euro’s appreciation. We believe that the central bank will stop its APP in September should growth print around the 2.3% projection with progress on inflation, while lifting interest rate up would come at a later stage. The pair later pared earlier gains after Trump said the greenback will get “stronger and stronger”. While it temporarily boosted the USD, his comments contributes to a political cacophony, coming a day after his Treasury Secretary mentioned the benefit of a weaker currency and in total contradiction with what both said a year ago (Feb. 2017) when Trump pushed for a weaker USD and Mnuchin supported a stronger currency. That said at this juncture, we prefer to turn cautious on the EURUSD as the pair reached our 1.25 target leaving a daily bearish price action (“long shadow”). Although the longer term picture continues to point for further upside, the pair could consolidate in the near term above a first support at 1.2225 and below the 1.2500/1.2630 area.

¨   AxJ Markets: Elsewhere in Asia, the USDIDR pair fell below the 13,300 level overnight prior to President Trump’s comments on the dollar, bolstered by foreign inflows into the Indonesian fixed income space. Bank Indonesia reiterated that there is little room for further headline policy manoeuvrability, although the institute retains the option to deploy macroeconomic tools if necessary. Expect the IDR to remain dollar-driven over the near-term, and we do not expect any tough responses from BI at current FX levels; stay neutral towards the IDR.

¨   MYR further extended its gains overnight, with the USDMYR pair decisively below the 3.90 psychological handle, after BNM lifted its OPR by 25bps in line with market expectations. The central bank remain optimistic towards both the global and domestic economy outlook, although it eye lower average inflation over 2018 on smaller impact from global cost factors, further mitigated by the stronger MYR. BNM also affirmed that the move was a pre-emptive one, similar to the last policy adjustment, hence we do not expect any further shifts in the OPR over the coming months; stay mildly constructive on the MYR.