FW: RHB FIC Rates & FX Market Update - 18/9/14

18 September 2014

Rates & FX Market Update

USTs Mildly Pressured as FOMC Adjusts Fed Funds Rate Higher in 2015; European Bonds Gained Following TLTRO Allotment

Highlights

¨    Yields on USTs edged higher overnight as FOMC increased its Fed funds rate forecast to a median of 1.375% by end-2015, compared with June’s forecast of 1.125%. Fed reduced its QE purchases USD15bn (-USD10bn m-o-m), with a high likelihood to end the QE program in October’s meeting. Signs of a less dovish committee were also evident as Richard Fischer joined Charles Plosser on the dissenting camp, warranting an earlier reduction monetary accommodation. Yields on short-dated Gilts rose 3bps as BoE minutes revealed majority raising concerns on increased risks from Europe and subdued inflation, with a 7-2 policy member divide to hold rates. European bonds gained across the board following the first TLTRO allotment yesterday while demand for the 2y Bunds issuance was weak, with the papers yielding -0.07%..

¨    In Asia, 10y ThaiGB found support in response to BoT’s decision to keep rates status quo at 2.0% to support the weak recovery. MYR edged higher by 0.34% to 3.2175/USD even as price pressures in Malaysia remained elevated at 3.3% (July: 3.2%), where RHBRI believes that softening July exports growth and factory output could ease expectations for an OPR hike this year. Meanwhile, Singapore’s NODX unexpectedly rebounded by 6.0% y-o-y in August (July: 3.3%), attributable to the non-electronics sector while South Korea plans to issue a record KRW102.9trn worth of KTBs next year to fund its expansionary budget; KTBs traded firm.

¨    MYR extended its bear run against the USD, where markets remain divided on the BNM rate decision today. We lean towards the view for BNM to stand pat even as inflation remained elevated at 3.3%, with external economic environment remains challenging. Implied volatility for USDMYR pair edged higher to 8.3bps (+2bps w-o-w), where we opine for it to test the 3.2438 resistance, as US data continues to print favorably.