FW: RHB FIC Rates & FX Market Update - 31/5/18

 

 

 

31 May 2018

 

 

Rates & FX Market Update

 

 

Italian-related Market Tensions Eased

 

Highlights

 

¨   Global Markets: Financial markets somewhat recovered from the knee-jerk reaction caused by the Italian political turmoil as concerns about the country leaving the EU eased;   the EURUSD bounced back above 1.1500 closing +1.10% higher, Italian BTP rallied with the 2y yield closing 110bps lower at 1.6000 and US Treasuries dropped. On the currency side, the move was also triggered by a reversal of the economic surprise differential between the US and the EU: the second reading for the US 1Q18 GDP growth disappointed and was revised lower  to 2.2% from 2.3% while German CPI beat expectations printing at 2.2% YoY (1.9% expected) boding well for today’s release of inflation for the Eurozone. We however prefer to remain neutral EURUSD at this juncture; given the recent sharp drop, a stabilisation is likely in the 1.1500 / 1.1855 zone.

¨   AxJ Markets: Over in Indonesia, BI hiked its 7D RRR by another 25bps to 4.75% in an extra-ordinary policy meeting, and remains receptive towards such meetings if the need arises. Markets cheered the decision, with the USDIDR pair firmly below the 14,000 level this morning; IMF also praised the decision as appropriate. While another rate hike remains on the table, BI will likely monitor: (i) USD movements; (ii) FOMC decisions; (iii) domestic data, before committing to another tightening. We continue to remain neutral on the IDR, with BI’s pro-active approach likely to anchor the currency, relative to peers with similar fundamentals.

¨   The USDJPY held above 108 rising modestly 0.24% as the risk sentiment partially improved. While the country’s economy contracted in the first quarter, the Ministry of Economy Trade and Industry reported that April retail sales rose and beat anticipations alleviating fears of a protracted slowdown. Over the long term, the USDJPY remains in a multi-month descending range between 104 and 111 where opportunities are to be sought on the range’s limits. In the short-term, we are neutral between 107.20 and 108.90/109. The Japanese Yen is likely to benefit from the renewed trade tensions between the US and China, geopolitical risk and the Italian situation.