Treasury Alert - 7 May 2014

Good Morning

The FX market finally saw a lower USD after weeks of range bound trading. USD index fell 0.47% to a 6-1/2-month low against a basket of currencies, as JPY and EUR both gained. The prospect of US Treasury yields moving lower despite the run of positive US data undermined sentiment towards the USD. US Treasury yields remain low with the 10-yr Treasury yield easing to 2.59% from 2.61% at Monday's close. Wall Street weakness, Ukraine tensions and expectations Yellen's testimony later today will be dovish in tone kept yields near recent lows. On Wall Street, financial shares fell following disappointing results from American International Group, and a selloff at Twitter Inc weighed on tech shares. Investors kept an eye on the unrest in Ukraine, where more than 30 pro-Russian separatists were killed in fighting near the east Ukraine rebel stronghold of Slaviansk, according to the interior minister. Russia announced plans to beef up its Black Sea warship fleet. EUR/USD traded to a 8-week high as 1.3952 as better than expected EZ retail sales and stronger Spanish and Italian Services PMI reinforced  the view the ECB will stand pat at Thursday's policy meeting. EUR is also supported by flows of capital into its southern economies, where interest rates on government debt are still much higher than those in the United States. The 10-yr Spanish bond yield fell 4bps to 2.94%; the 10-year Italian bond yield fell 4bps to 3.00%; EUR however fell against AUD, NZD, CAD and GBP. Ongoing clashes in Ukraine, meanwhile, drove buying in the safe-haven yen. JPY also gained on weakness in equities. USD/JPY fell as low as 101.50 yen and ended the day down 0.45%. GBP/USD rose to highest level nearly five years at 1.6996, with bulls now targeting 1.70, a level last seen in August 2009 as a survey showed Britain's services sector expanded faster than expected in April. The Markit/CIPS services purchasing managers' index (PMI) rose to 58.7 in April from 57.6 in March. A Reuters poll had forecast an unchanged reading. Two-year British yields rose around 8 basis points from Friday's close to 0.774% - their highest since July 2011. The best performing currencies were NZD - which gained over 0.7% against USD and 0.3% against JPY. AUD gained 0.83% against the USD and 0.45% against the EUR and JPY. AUD/USD touched a two-week high of 0.9368 while NZD/USD rose to 2-1/2 year high of 0.8780. NZD and AUD were underpinned by fresh demand for carry trades. Just after the US close - NZD/USD fell from 0.8744 to 0.8700 on comments from the RBNZ's Wheeler indicating the RBNZ could intervene if the NZD defied fundamentals and kept moving higher and the high NZD could influence interest rate decisions. The Australian central bank's policy meeting was the only notable economic event in Asia, and the Reserve Bank of Australia (RBA) kept the cash rate at a record low of 2.5%, just as markets had priced in. China's yuan hit its strongest point in two weeks, following talk of central bank intervention to support the currency after it touched an 18-month low last week.

Asian session, Australia retail sales data due, expected to show a 1.5% increase Q/Q. The safe-haven JPY might gain more momentum if a survey on China's services sector due at 0145 GMT were to disappoint. Federal Reserve’s  Yellen due to speak at congressional hearings on Wednesday and Thursday. Though widely expected by analysts to maintain a dovish policy stance, she will be closely watched for hints on raising interest rates, which many forecasters see starting in 2015. Most Asian currencies edged up versus USD on Tuesday as the Chinese yuan extended gains and as USD fell across the board amid expectations US interest rates will remain low for some time. USD/MYR traded a 3.2510-3.2600; last at 3.2520. Overnight, USD/MYR NDF traded a 3.2490-3.2560 range; last in NY at 3.2490/10. USD/MYR opened today’s trading slightly lower at 3.2470-2500 taking cue from overnight broad USD weakness. Expected to trade between 3.2400-3.2600 range. Malaysia’s March trade data due today. Exports in March likely rose 8.5% from a year earlier, supported by strengthening global demand for electrical and electronics products.

Imports were expected to rise 5.2 percent, resulting in a trade surplus of 7.4 billion ringgit.

Linda Lopez

Derivatives Sales

Global Markets, RHB Bank Berhad

Level 3 Tower Two, RHB Centre, Jalan Tun Razak, 50400 Kuala Lumpur.

DL +603- 92072831 | M +012-3703084  | F +603 9287 4888

Hunting Line: +603 92072688

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