18 May 2018
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Rates & FX Market Update
First BI Rate Hike since Monetary Regime Shift to Defend Currency
Highlights
¨ Global Markets: While the USD was marginally higher against its major peers, (DXY +0.08% d-o-d), the EURUSD remained under pressure by (i) higher US rates (UST 10y yield +1.5bps d-o-d) and (ii) lingering concerns and uncertainties surrounding Italy’s next government and prime minister; Monday is the day when the far-right League and anti-establishment Fiver Star Movement have to agree. The pair is still holding above the 1.1760 support with little elements to suggest the EURUSD could retrace higher than 1.1940 / 1.2050 in the near term; we remain neutral EURUSD. Australia added 22.6k jobs in April (consensus: 20k), supporting the widely-held view that labour markets are gradually improving, even as unemployment rate came in at 5.6% (consensus: 5.5%); AUDUSD was relatively unchanged overnight as DXY consolidated. Meanwhile, the tightening labour market has yet to translate into substantial wage increases, with RBA likely to remain status quo at this juncture; stay neutral AUD.
¨ AxJ Markets: Over in Malaysia, 1Q18 GDP came in at 5.4% y-o-y, lower than the 5.6% consensus estimate, although the pace of expansion remains robust. USDMYR was relatively flat overnight, even as rating agencies warned that the GST cut is credit negative without any adjustment measures to Malaysia’s revenues or expenses. We retain our previous call for a slightly higher USDMYR pair over the remainder of 2018, but remain watchful for any updates from the Finance Ministry with regards to Malaysia’s fiscal plans; a neutral MYR stance remains appropriate. Last but not least, outgoing BI governor raised the bank’s benchmark rate by 25bps to 4.50%, and vowed stronger measures to maintain macro stability. IDR was c.0.3% stronger against the USD overnight, although the USDIDR pair remains above the 14,000 handle. While BI’s resumption of its hiking cycle may offer near-term support for Indonesian assets, a higher global interest rate environment and the stronger USD continues to pose external pressures, with cautiousness from foreign investors set to continue albeit at a slower pace; we eye USDIDR to reach 14,400 by end-2018.
¨ It has been a difficult week for the Japanese economy which reported a growth contraction in the first quarter of 2018 while inflation slowed in April missing expectations. The inflation print is however in line with BoJ’s downward revised inflation outlook As such, the Bank is expected to remain on hold at its next meeting in June. The USDJPY continued to drift higher now nearing 111. While the pair is technically overbought, rising US rates are likely to maintain upward pressure on the USDJPY.
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