FW: RHB FIC Rates & FX Market Update - 26/8/14

26 August 2014

Rates & FX Market Update

USD Sustained Strength Despite Disappointing US Data; Eurozone Govies’ Outperformance Buoyed by Dovish ECB

Highlights

¨    DXY sustained above its 200-day MA at 82.5 despite the disappointing US new home sales in July, in line with what most FOMC members felt about the slow housing recovery. While the stronger USD pushed the EUR to its lowest level since September 2013 at 3.19, mounting tensions in Ukraine and further easing expectations from the ECB as well as slower inflation in the Eurozone buoyed demand for safe haven bunds, with strong buying activities into Eurozone peripheral govies. Looking ahead, the less dovish FOMC could assert pressure at the front-end UST, and may dampen interest in the 2y UST auction later today. JPY weakened higher at 104.1 despite escalating geopolitical tensions, and the continued sell off in the currency was more driven by optimism in the US economy.

¨    While Singapore’s headline CPI slowed 1.2% y-o-y in July (consensus: 1.8%; June: 1.8%), core inflation edged higher at 2.2% driven by the services sector; SGD remained muted at 1.25 following the release, but a pickup in industrial production due to be released today (Jul: 3.70%; June: 0.40%) could provide a near-term support for the currency. Meanwhile, the 20y KTB auction garnered strong demand at BTC of 4.40x, versus July’s 4.31x; yields were cut off at 3.305%. Post auction, yields on the 20y declined to 3.280%.

¨    While near-term bullish momentum was capped by persistent weakness in the housing data, we expect USD to consolidate above 82 key support, where we opine the US economic recovery remains on track towards the Fed’s objective, with the second estimate of 2Q14 GDP growth expected at 3.9%.