2016, Issue VI: Should We be
Worried About Post-Brexit Uncertainty
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First,
US Fed timeline for eventual future rate hike remains data dependent. US growth
recovery remains on track but recent global developments out of China and enhanced
volatile market activity due to Brexit may potentially affect the number
of hikes in 2016. Generally expect USD to be more mildly positive now.
We are now not expecting a hike in 2016 and at most 1 hike in 4Q at the
most. Key US events: ISM Manufacturing Mar (1 Jul)
(expected: 51.4); Factory Orders (5 Jul); June FOMC minutes release (7 Jul); US
Beige Book (14 Jul); US May NFP (8 Jul) (expected: 180k); CPI (15 Jul); GDP 2Q
(29 Jul); FOMC decision (28 Jul). Fed Lockhart speaks in Idaho (14 Jul); Fed George
speaks in Oklahoma City (15 Jul).
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Second,
Japan’s 2% inflation target has been pushed back to 2H FY 2017 (by Mar 2018)
due to oil softness and slow traction in wage increases. The credibility of
Abenomics has waned somewhat in 2016 even though the easing bias is still
clear. We do not expect any further moves by the BOJ until Jul meeting at
the earliest and further jawboning is likely until then. Postponement of
the consumption sales tax hike to Oct 2019 is now very likely, removing a
likely drag on the economy. BOJ meets on 29 Jul to decide on
policy. CPI (29 Jul)There is also the final print of 1Q 2016 GDP due on 8 Jun.
JGB auctions in Jun: 10-year (5 Jul), 30-year (12 Jul), 5-year (14 Jul), 1-year
(15 Jul) and 20-year (20 Jul).
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Third,
post-Brexit, odds are rising for ECB to cut rate by another 10bps, but
we think it remains too early to tell. To be sure, Brexit creates EU contagion
risks. It is likely to see more Far Right parties within the Euro-group (in
Spain, Italy, France) to call for “Leave EU” referendums. The second order
effects of a Brexit on the future of the Euro-club could be further undermined
and this could further heighten market volatility and trigger risk-off
sentiment in the short term. EUR is likely to remain under pressure towards
1.07-1.08 levels. We expect ECB to monitor market development, assess impact of
the UK-fallout and not take hasty action remain while still adopting an easing
bias at the upcoming meeting (21 Jul). We believe ECB stands ready to provide
additional liquidity measures, when necessary. Data/Events we are watching for
the month ahead includes Jun CPI (15 Jul); Jul ZEW survey (19 Jul); ECB meeting
(21 Jul); Jul Flash PMIs out of Eurozone (22 Jul) and Euro-area Jul confidence
data (28 Jul).
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Fourth,
China still has excess capacity, heavily indebted corporations and huge
liquidity injections continue to add immense pressure on the economy and the
yuan medium term. PBOC continues to rely on SLF, MLF and PSL as liquidity
tools, we do not rule out interest rate cut of 25bps and RRR to be cut in
intervals by another 100bps in the second half of the year. 2Q GDP and activity
indicators (i.e. urban investments, industrial production and retail sales)
will be eyed on the 15th. Jun PMI-mfg is due on 1 Jul along with Caixin
version. Foreign reserves is scheduled for release on the 7th. CPI and PPI on
the 10th. Liquidity numbers are due from 10th-15th. We also eye
potential inclusion into MSCI and JPM bond indexes.
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We
could see some USD support as cautious risk sentiments may linger post Brexit.
In the lead up to Jul/Sep/Dec FoMC, USD could be more supported against
the majors (i.e. GBP and EUR) than against AXJs. High yield plays may emerge,
lending support to AXJs (IDR and MYR) and antipodeans.
[1] Underlined words represent
new developments in the FX themes.
