FW: RHB FIC Rates & FX Market Update - 3/9/14

3 September 2014

Rates & FX Market Update

DM Bonds Lost on Robust US Manufacturing Data; Currencies Weakened Against Stronger Greenback

Highlights

¨    DM bonds slid overnight while currencies lost on a stronger DXY following robust manufacturing data out of the US. Both the UST and UK Gilt curve bear steepened with yields on the 10y UST rising 8bps to 2.42% while the 10y Gilt rose 6bps after the US August ISM manufacturing print edged up to its highest since April 2011 at 59pts (+1.9pts). The UK’s construction PMI print came in at a 7-month high of 64pts (+1.6pts). Additionally, the new 07/20 Gilt was successfully issued garnering a BTC of 1.59x (Jul: 1.54x) a cut off yield of 1.939%. In the Eurozone, govies lost with long end OATs underperforming, adding 6-8bps with investors opting to take profit on bets that the ECB may disappoint on Thursday. Else, the AUDUSD dropped below 0.9280 after a dovish RBA left interest rates unchanged for a 13^th straight month while stressing that the AUD remains a risk to growth. Regardless, we expect the AUD to weaken after the 2Q current account deficit print widened to AUD13.7bn (+AUD5.9bn).

¨    In Asia, bonds were mixed while currencies lost with the MYR underperforming, depreciating to 3.1775 (+0.69%) while the USDSGD was trading slightly above 1.2530 (+0.33%) after August’s PMI print swung into contraction territory but we opine for a pickup in manufacturing and exports from Singapore by year’s end on improving global demand. In China, services activity accelerated as non-manufacturing PMI edged higher to 54.4 (+0.2pts) while services PMI surged to 54.1 (+4.1pts). Else, the South Korean government plans to increase FY15’s budget which may see the deficit rising higher than FY14’s deficit of 1.8%.

¨    GBPUSD broke the near term support of 1.6486 overnight ahead of the BoE meeting tomorrow where we expect a less hawkish MPC. We opine for the weakness in the GBP to persist and continue its trajectory towards the near term support of 1.64 on expectations that the BoE will leave interest unchanged but recent technical indicators suggest the currency is highly oversold.