FW: RHB FIC Rates & FX Market Weekly - 5/2/18

 

 

 

5 February 2018

 

 

Rates & FX Market Weekly

 

 

Higher UST Yields Heightening Fears among Global Investors

 

Highlights

 

Global Markets

¨   The week ahead is expected to be lively in the US. After the government was forced to shut down for 3 days in January, the stopgap bill expires on Thursday and negotiations surrounding a very uncertain outcome weighing on sentiment could drag the USD further down and send UST yields even higher. Various Fed officials will speak as J. Powell takes the lead at the Fed. While a March rate hike is very probable, comments on inflation and rising yields will be scrutinised as bond markets have started to reprice higher price pressure, and possible Fed actions. A lingering negative sentiment on the US is likely to keep the USD depressed, underscoring our mildly bearish view.

¨   A busy week on the monetary policy front in Europe as Mario Draghi presents the ECB' annual report to the European parliament while the ECB releases its economic bulletin and the European Commission its economic forecasts. A robust outlook will likely fuel further speculation that the ECB will stop its APP in September while Mario Draghi could "talk down" the currency as the EURUSD tests 1.25 again. We remain mildly bullish on the EUR as the ECB moves eventually closer to the end of the QE. Over in the UK, BoE set monetary policy and we expect, in line with consensus, the benchmark interest rate to be left at 0.50%, with a hike likely in 2H18 given the uncertainties still surrounding the Brexit negotiations. The updated growth and inflation forecasts could however give more colour on the likely timing of such a decisions; remain neutral GBP.

¨   In Japan, focus will remain on BoJ's operations after Kuroda offered to buy unlimited amount of JGBs to curb rising yield, keeping 10y JGB below 0.10% and contain JPY's appreciation. Widening US/JP spreads are not weakening the JPY as rising US rates and concerns over the stock markets may somewhat provide support for the safe-haven Yen; remain neutral JPY on confliction factors. Over in Australia, RBA reconvenes for the first time in 2018 on 6 February, where recent weakness in the 4Q17 inflation reading will likely spark fierce debate among policymakers with regards to the timing of normalization, if any at all. We envisage the RBA to err on the side of caution, with the overall tone likely to be neutral or dovish-leaning, which could continue to exert pressure on the AUD despite the AUDUSD pair remaining above 0.80, attributed to a weaker USD backdrop; stay neutral AUD.

 

AxJ Markets

¨   Expect a busy Chinese economic calendar in the week ahead with Caixin services PMI, foreign reserves, trade data and CPI due. Strong services PMI and trade data will continue to reinforce the notion of stable Chinese growth momentum. Expect CNY to remain relatively stable in the week ahead even if data disappoints, with USD movements and liquidity conditions likely to be greater catalysts; we remain neutral towards the CNY.

¨   In Singapore only Nikkei PMI is due hence SGD assets should take cues from USD and UST movements, the latter particularly in focus after 10y yields surged near 2.80%; stay neutral on the SGD and SGS at this juncture. Over in Thailand, improving consumer confidence may point towards a broader economic recovery, likely to further support the THB which has once again attracted greater scrutiny from the BoT. Foreign reserves will likely be a low-key event for the THB, given sufficient accumulation already; stay neutral THB.

¨   Elsewhere, expect a relatively heavy data week in Malaysia including foreign reserves, trade data, and Industrial Production due. With foreign sentiment towards the nation remaining strong, the MYR should remain supported against its peers, with Malaysian watchers likely to keep a keen eye on upcoming inflation prints; stay mildly bullish MYR at this juncture. Lastly in Indonesia, the economy is anticipated to expand 5.12% y-o-y over 4Q17, an impressive rate relative to regional economies, yet mildly disappointing versus initial government forecasts. Going forward, expect BI to remain supportive of Indonesian growth amid still-subdued inflation, although another direct rate cut remains a high hurdle to clear; stay neutral IDR.

  

Weekly Positioning

 

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

 

 

This message is intended only for the use of the person(s) to whom it is addressed and may contain information that is privileged or otherwise protected from disclosure. If you are not the intended recipient you are hereby notified that any use, review, disclosure or copying of this message and the information it contains is prohibited. If you receive the message in error, please notify the sender by reply e-mail and discard all its contents.   Thank You.