FW: RHB FIC Rates & FX Market Update - 2/7/14

2 July 2014

Rates & FX Market Update

DM Govies Reversed Overnight Gains; Asian PMIs Supported Risk Appetite; HKMA Defended Currency Peg Yesterday

Highlights

¨    DM govies reversed overnight gains, buoyed by the broadly positive domestic economic prints and indications of a global manufacturing recovery. By contrast, manufacturing activity remained soft ahead of the ECB meeting on Thursday were we continue to expect no surprises; EURUSD consolidated between 1.3676/97 overnight. ACGB yields climbed 3-4bps higher while AUDUSD broke its resistance of 0.9465, with a strong run up in the US/European sessions, supported by the positive Chinese PMI and the RBA’s decision to maintain its accomodative stance. Among others, the JPY slid despite positive PMI prints, weighed by the disappointment Tankan survey results. Expect further volatility in global markets in the session ahead with Poroshenko ending Ukraine ceasefire. Aside, Yellen's comments at IMF today should lend some insight into Fed's 2H14 plans.

¨    Positive risk sentiment supporter Asian markets overnight, extending optimism from the stronger PMI prints. China remains the exception given the volatile midyear money markets where the 7 day repo rate opened 50bps lower this morning.  Next door, HKMA stepped in to defend the currency peg at 7.75/USD for the first time since 2012 as commercial activities drove the HKD towards its upper bound. Elsewhere, IndoGBs and GoISecs rallied following positive trade and PMI figures while political uncertainty in Indonesia further supports our cautious stance towards IndoGBs and the IDR (neutral to tactical mild underweight).

¨    Despite the weaker USD, the EURUSD pair failed to extend its rally beyond 1.37 yesterday, consolidating at the 1.3676/97 levels overnight. While we expect no surprises from ECB's meeting tomorrow, investors begun to trim long positions in EUR ahead of the meeting where we expect the pair to remain sticky.