FW: RHB FIC Rates & FX Market Update - 25/8/14

25 August 2014

Rates & FX Market Update

Jackson Hole Talks Further Underscores the Divergent Monetary Policy

Highlights

¨    Investors were fixated on the Jackson Hole Economic Symposium; Yellen retracted briefly on her usual dovish stance but shared concerns on the concealed labour market slack given the high underemployment rate while preparing markets for tightening policy measures next year. This contrasted Draghi’s signal for further ECB action, including further easing via QE, following weaker inflationary expectations.  Resultantly, the USD strengthened following the Yellen’s balanced tone, while the EURUSD plunged 0.66% to 1.3194, touching a fresh 11 month low intraday. Similarly, European bonds posted small gains, riding on Draghi’s commitment for further easing while USTs and Gilts traded softer. Yields on JGBs declined 2-3bps across the curve despite Kuroda’s assurance in BoJ’s monetary policies to fight deflation while remaining receptive towards the use of foreign workers to mitigate labour force shortages; JPY weakened by 0.33%, breaking above 104/USD on Friday.

¨    Meanwhile, the Thai King is expected to endorse Junta leader Prayuth as the next Prime Minister, where Prayuth will continue to lead the NCPO while working to form his cabinet by September alongside optimism in Indonesia as Jokowi prepares to take office in October, IndoGB yields down 1-8bps. The KRW topped Asian FX performance against the USD, appreciating 0.59% to 1017.70 ahead of current account, consumer confidence and IP data due this week.

¨    EUR declined 0.66%, ending the week below 1.32/USD, where the weak EU economic recovery continues to pressure ECB for further stimulus measures to boost spending and inflation growth in the region. We expect weakness in the pair to persist over the medium term with our YE14 forecast at 1.31, particularly as investors increasingly price in policy tightening measures from the Fed and BoE.