FW: RHB FIC Rates & FX Market Update - 11/7/14

11 July 2014

Rates & FX Market Update

Fed Expects US to Miss Inflation Target; BoE, BoK & BI Held Rates; BNM Hiked OPR; Core and Peripheral Europe Spreads Widen

Highlights

¨    Fed speak and risk aversion in markets overshadowed improving initial jobless claims driving UST yields lower.  The Fed’s presentation slides revealed that the US will miss the inflation and unemployment targets at least till 2016. BoE kept its Bank Rate and Asset Purchase target at 0.5% and GBP375bn, where the MPC minutes released later this month may reveal diverging rate expectations. In Europe, decline in France’s and Italy’s IP exacerbated the weak market sentiment surrounding the Portuguese banking sector; PGBs led the decline in peripheral bonds with spreads between the core and peripheral bonds continuing to widen.

¨    Investors’ demand for safe haven bonds drove gains in most Asian bonds following resurfaced concerns over the Portuguese banking system, overshadowing China’s firm export growth in June. BoK and BI held rates; BNM raised its overnight policy rate by 25bps where it cited firm growth prospects coupled with inflationary pressures supporting their decision for a rate hike. Going forward, BNM is open to continue its tightening stance in measured steps, though the current rate is probably still growth-supportive. In India, Jaitley kept the fiscal deficit target at 4.1%, funding part of the expansionary budget through sale of state assets where we opine for it to be an unsustainable plan, prompting weakness in the GolSec and INR. Jaitley also cited plans to reduce India’s deficit target to 3% by the next few years though the enlargement of revenue base, keeping an expansionary budget to support economic growth.

¨    Despite the plan for currency liberalization, the CNY remains sensitive to PBoC’s Yuan fixing which has been fixed significantly stronger at 2 instances after reporting strong trade data. Against the backdrop of strict capital restrictions, we continue to expect the CNY to mirror the PBoC fixings closely with little deviations.