FW: RHB FIC Rates & FX Market Update - 30/7/14

30 July 2014

Rates & FX Market Update

No Surprises Expected from FOMC; Better US Data to Support USD

Highlights

¨    Global bond markets gained on new sanctions imposed on Russia and the persistently weak market sentiment. 10y German Bund marked a new low of 1.12% yesterday, bolstering the attractiveness of USTs where the spread between both 10y papers widened to 134bps. Demand for the 5y UST reopening was strong given the relative allure of the belly versus the UST curve; the auction recorded the strongest BTC since 2012 (cut-off: 1.72%; BTC: 2.81x vs June: 1.67%; 2.74x). We expect little surprises from the FOMC meeting concluding today; Yellen is expected to reiterate her dovish stance despite optimistic data releases recently. Bullish GDP and ADP prints tonight should see the EURUSD gravitate and possibly break the 1.34 support. Meanwhile the JPY closed at the upper end of its trading range yesterday (101.82-102.16) where we may stagger a tactical long from 102.10/USD.

¨    Lighter flows in Asia with some countries out for festive holidays; KRW extended gains to 1024.5/USD where the pair may be driven higher given expectations for a 25bps BoK rate cut in 2H14 alongside expansionary fiscal initiatives from the government to revive the weak domestic economy and imports. The 10y SGS reopening was successful, anchored by domestic investors, drawing a cut-off yield at 2.42% (BTC: 1.58x) in line with our expectations. Inflows continued to return to Thailand on improving data where custom exports printed +3.9% y-o-y in June vs  -2.1% in May; offshore players added THB6.1bn of Thai Bonds, THB firm at 31.840/USD. 

¨    CNY reached a 4 month high of 6.1816/USD following news signaling the possibility of offshore participation in the Shanghai stock market which should further bolster demand for CNY. Even so, IMF suggests that the CNY was 5-10% undervalued, proposing fewer PBOC interventions to support the currency’s transition to a flexible exchange rate regime.