OCBC TREASURY RESEARCH

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OCBC TREASURY RESEARCH

Daily Market Outlook

17 September 2020

Treasury Research & Strategy 1

Market Themes/Strategy

 US equities gave up early gains to close lower. Back-end UST yields were higher on FOMC, exhibiting a steepening bias not unlike what happened after Jackson Hole, but to a smaller extent. Note that the

FX Sentiment Index (FXSI) has started to edged lower within the Risk-On zone. Risk-on sentiment may be starting to gain traction again.

 The broad USD firmer against the EUR overnight, but still softer again the other currencies. In particular, the USD-JPY may be in focus, flexing against the lower end of the range at 105.00. The GBP outperformed on further short-covering after PM Johnson came to a deal with his own party members on the Internal Market Bill.

 The Fed added a new paragraph in the statement to formalize the average inflation targeting, with the current policy rate to be maintained until “inflation has risen to 2% and is on track to moderately exceed 2% for some time”. Two regional Fed presidents, Kaplan and Kashkari, voted against the action. Their objections suggest that they may want a more explicit dovish tilt in the rhetoric. Elsewhere, there is no change in the pace of asset purchases, and FY2020 economic forecasts were upgraded compared to June.

Overall, The FOMC perhaps delivered as market had expected. The absence of additional dovish tilts (expanding asset purchases, yield curve control etc) means that the floor below the USD still in place.  Attention shifts to the GBP and BOE. There has been some short

covering in the GBP, after PM Johnson cut a deal with party members over his new bill, and it is now more likely to pass through UK Parliament. However, from the EU’s perspective, the reason why

they took issue with this legislation in the first place is unchanged.

The UK can still unilaterally tweak parts of the Withdrawal Agreement – the only difference is that it now requires parliament approval, where PM Johnson has a good majority anyway. Note that on the EU’s side, they view the chances of a Brexit deal, and the trust in PM Johnson, reducing by the day. On the BOE front, chatter is that it will be priming the market for more asset purchases in 4Q. Expect it to sound dovish overall. Overall, we still remain negative on the GBP at

this point, pending clarity on the Internal Market Bill and the BOE.  Expect the post-FOMC moves to be eventually faded. The soft USD

thesis still in place for now. The Fed delivered as expected, but did not provide any fresh catalysts to bring USD another leg lower. Overall, expect the USD to retain its weak, consolidative posture for now, Terence Wu FX Strategist +65 6530 4367 [email protected] Treasury Research Tel: 6530-8384

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OCBC TREASURY RESEARCH

Daily Market Outlook

EUR-USD

Consolidate. The EUR-USD was taken lower towards the first support

level at 1.1750 early Thu, as the USD bounce post-FOMC persisted. Nevertheless, we are not expecting significant traction beyond that level. Our bias is for the pair to eventually ease back higher towards 1.1800. 1.02 1.04 1.06 1.08 1.10 1.12 1.14 1.16 1.18 1.20 S e p -1 8 N o v -1 8 J a n -1 9 M a r-1 9 M a y-1 9 J u l-1 9 S e p -1 9 N o v -1 9 J a n -2 0 M a r-2 0 M a y-2 0 J u l-2 0 Actual Fitted USD-JPY

Threatening to breach range. The BOJ is expected to stand pat in its

decision today. New PM Suga takes his place, with some quarters expecting snap elections soon to win him a new mandate. The USD-JPY not too responsive to these headlines for now, and continues to flex at the 105.00 bottom end of the recent range. A breach of 105.00 opens the route to 104.20 on the downside. Note that the divergence between spot and short term implied valuations have opened up further. 101 103 105 107 109 111 113 115 S e p -1 8 N o v -1 8 J a n -1 9 M a r-1 9 M a y-1 9 J u l-1 9 S e p -1 9 N o v -1 9 J a n -2 0 M a r-2 0 M a y-2 0 J u l-2 0 Actual Fitted AUD-USD

Consolidate. The AUD-USD reacted positively to a strong beat in

Australian employment numbers early Thu, but was swiftly sold down as US e-minis turned softer. Overall, the failure to hold gains above the 0.7300 mark leaves the pair in a broadly consolidative tone. Near term supports at 0.7250, before 0.7200.

0.55 0.60 0.65 0.70 0.75 S ep -1 8 N ov -1 8 Ja n-19 M a r-1 9 M a y-19 Ju l-1 9 S ep -1 9 N ov -1 9 Ja n-20 M a r-2 0 M a y-20 Ju l-2 0 Actual Fitted GBP-USD

Staying negative. The compromise that PM Johnson arrived at with

his party members may be scant consolation from the EU’s point of view. The possibility that the UK can unilaterally alter the Withdrawal Agreement remains unchanged. The bounce higher in GBP-USD was capped at 1.3000, and expect this to remain as the first resistance northwards. Bears will have to first breach 1.2870 to get better

traction. 1.14 1.19 1.24 1.29 1.34 S e p -1 8 N o v -1 8 J a n -1 9 M a r-1 9 M a y-1 9 J u l-1 9 S e p -1 9 N o v -1 9 J a n -2 0 M a r-2 0 M a y-2 0 J u l-2 0 Actual Fitted USD-CAD

Consolidate. The USD-CAD is lifted higher through the 1.3200

resistance, with the 9 Sep high at 1.3259 the main target for now. If the USD bounce gains further traction, the pair may seek the 55-day MA at 1.3312. 1.27 1.32 1.37 1.42 1.47 S e p -1 8 N o v -1 8 J a n -1 9 M a r-1 9 M a y-1 9 J u l-1 9 S e p -1 9 N o v -1 9 J a n -2 0 M a r-2 0 M a y-2 0 J u l-2 0 Actual Fitted

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OCBC TREASURY RESEARCH

Daily Market Outlook

Asian Markets

 USD-Asia: The USD-CNH saw no significant reaction in the immediate

aftermath of the FOMC, but spiked higher early Thu. Nevertheless, we do not expect this to shake out the fundamental negative view on the USD-CNH. So long as the pair holds below 6.8000, we expect the target to still be fixed at 6.7100/200 on a multisession horizon. Elsewhere, look for BI policy decision later today. Our house views calls for no rate cut this time round, with currency stability likely to take centre-stage for now.

 On the Asian portfolio flows front, note a slight uptick in equity flows environment, supported by a moderation of outflows from South Korea and Taiwan. Inflows into India, however, has continued to softened. On the bond front, inflows into South Korea has picked up, but outflows from Indonesia persist.

 USD-SGD: August NODX came in stronger than expected at 7.7% yoy,

perhaps alleviating some of the concerns arising from the labour market report earlier this week. The SGD NEER is marginally firmer at at +0.36% above the perceived parity level (1.3649) this morning. The USD-SGD may see some consolidation around the 1.3600 mark, but the broader environment of a firm RMB and weak USD should continue to exert downward pressure on the USD-SGD. Overall, the pace of decline in the USD-SGD should be relatively gradual.

FX Sentiment Index Technical support and resistance level

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Ja n -1 6 Ju l-1 6 Ja n -1 7 Ju l-1 7 Ja n -1 8 Ju l-1 8 Ja n -1 9 Ju l-1 9 Ja n -2 0 Ju l-2 0 RISK OFF RISK ON S2 S1 Current R1 R2 EUR-USD 1.1744 1.1751 1.1769 1.1800 1.1921 GBP-USD 1.2763 1.2900 1.2924 1.2992 1.3000 AUD-USD 0.7183 0.7200 0.7281 0.7300 0.7395 NZD-USD 0.6600 0.6631 0.6695 0.6700 0.6789 USD-CAD 1.3030 1.3200 1.3219 1.3260 1.3287 USD-JPY 104.81 105.00 105.09 105.10 106.00 USD-SGD 1.3570 1.3600 1.3610 1.3700 1.3729 EUR-SGD 1.6000 1.6014 1.6018 1.6058 1.6100 JPY-SGD 1.2900 1.2936 1.2953 1.2970 1.3000 GBP-SGD 1.7445 1.7500 1.7590 1.7600 1.7675 AUD-SGD 0.9860 0.9900 0.9909 1.0000 1.0050 Gold 1910.63 1927.26 1945.40 1976.28 2000.00 Silver 26.07 27.10 27.16 27.20 28.24 WTI Crude 36.13 39.80 39.82 39.90 40.30

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OCBC TREASURY RESEARCH

Daily Market Outlook

Trade Ideas

Inception B/S Currency Spot/Outright Target Stop Rationale

TACTICAL

1 11-Sep-20 S GBP-USD 1.2826 1.2375 1.3034 Renewed Brexit malaise; BOE may tilt

dovish

STRUCTURAL

---

---RECENTLY CLOSED TRADE IDEAS

Inception Close B/S Currency Spot Close Rationale P/L (%)

1 15-Jun-20 15-Jul-20 S AUD-USD 0.6841 0.7018

Risk-off tone after equity rally fizzled out and refocus on virus cases; testy relationship with China

-2.52

2 15-Jun-20 21-Jul-20 S GBP-USD 1.2520 1.2750 BOE relatively more dovish than

expected; EU-UK Brexit talks stalling -1.78

3 27-Aug-20 01-Sep-20 S EUR-USD 1.1830 1.1977

Powell may disappoint dovish expectations; long EUR positioning peaking

-1.22

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---OCBC TREASURY RESEARCH

Daily Market Outlook

Treasury Research & Strategy

Macro Research

Selena Ling

Head of Research & Strategy [email protected]

Tommy Xie Dongming

Head of Greater China Research [email protected]

Wellian Wiranto

Malaysia & Indonesia [email protected]

Terence Wu

FX Strategist

[email protected]

Howie LeeThailand, Korea &

Commodities

[email protected]

Carie Li

Hong Kong & Macau [email protected]

Dick Yu

Hong Kong & Macau [email protected]

Credit Research

Andrew Wong

Credit Research Analyst

[email protected]

Ezien Hoo

Credit Research Analyst [email protected]

Wong Hong Wei

Credit Research Analyst

[email protected]

Seow Zhi Qi

Credit Research Analyst [email protected]

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