FW: RHB FIC Rates & FX Market Update (amended) - 21/7/14

21 July 2014

Rates & FX Market Update (amended)

DM Govies Mixed Amid Looming Geopolitical Tensions; Indonesian Presidential Election Results to Take Center Stage

Highlights

¨    Geopolitical tensions persisted amid a thin economic calendar on Friday; 10y UST backed up 4bps to 2.48% following new US sanctions against Russia. Consumer sentiment dimmed to a 4 month low of 81.3 (-1.2pts m-o-m) given a lack of wage growth. In Europe, the EURUSD pair inched below the 1.50 level for the first time in 5 months as investors cut net short positions; the pair steadied at 1.353 at closing. Meanwhile, the Eurozone current account surplus narrowed marginally to EUR19.5bn in May from EUR21.6bn prior. Notably, the AUD rallied strongly on Friday to trade between the 93.36-94.10cents/USD range. We expect safe haven bids to persist this week as tensions stemming from the Middle East continue to escalate.   

¨    In Asia, expect a relatively quiet week ahead in terms of economic releases where attention should remain on China’s Manufacturing PMI on Wednesday. Else, the official Indonesian presidential election results are due tomorrow where Jokowi continues to lead polls by a 2-6% margin where Prabowo is increasingly expected to contest the results which may exert negative pressures on the Indonesian markets as outlined in our RHB FIC view (3 July 2014). Meanwhile, Chinese government has announced measures to implement consumptions tax in a bid to ease debt burdens on state governments given its stable stream of income vis-à-vis issuing debt which would exacerbate balance sheet weaknesses.

¨    The USDIDR rallied strongly to 11,615 ahead of election results due tomorrow. Investors remain upbeat given Jokowi’s lead; 1-month NDFs have dropped 0.89% overnight to 11,670. Jokowi’s victory could see the IDR strengthening towards its near term resistance of 11,453/USD. Short term risk to forecast includes an increasing likelihood of Prabowo contesting election results.