FW: RHB FIC Rates & FX Market Update - 21/8/14

21 August 2014

Rates & FX Market Update

Yields Higher on Hawkish Minutes; USD Rallied on Strong Demand; Downtick in Malaysia’s CPI Eases Speculations for a Hike in September

Highlights

¨    USTs and Gilts lost after Fed minutes signaled the possibility of an earlier rate hike while BoE Minutes surprised with 2 opposing votes. The DXY index climbed to its highest level since September 2013 where fresh buying followed the FOMC minutes which suggested an overstating of labour slack in the market and the risk of overshooting unemployment and inflation targets. The meeting minutes also included discussion over Fed’s exit plan where the interest on excess reserves (IOER) was highlighted as the main tool to move FFR, with overnight reverse repos setting a floor; members also agreed to maintain MBS holdings. The prospect of wage growth was in debate among BoE members, where the two dissenting votes cited lagging effects and pre-emptive tightening. Nonetheless, the softer CPI prints post-BoE meeting may erode some of the bullishness in September. The eventful day saw heavy flows on both the EUR and JPY, both weakening against the stronger USD. The 2y Bund reopening was covered at 2.0x BTC despite the 0.0% cut-off, but remained higher than the YTD average of 1.8x. PGBs extended gained after positive fiscal developments with the constitutional court approving expenditure cuts.

¨    Asian FX broadly underperformed given the strong kneejerk reaction to the hawkish tilt from the FOMC minutes amid busy two-way action. USDMYR weakened 0.34% overnight where the downtick in July’s CPI to 3.2% versus 3.3% prior despite festive demand could ease speculations for BNM to hike in September. We maintain our FY14 USDMYR forecast at 3.15, with expectations for some weakness in the near term.

¨    We took profit on our tactical long USDJPY position which was pushed higher amid sustained demand for USD yesterday and Japan’s dismal trade data. The pair broke the 103.37 resistance and the upper Bollinger band after trading close to the top over the recent months. We continue to expect USD to drive the pair and could test the high of 104 last seen in April.