FW: RHB FIC Rates & FX Market Update - 10/10/14

10 October 2014

Rates & FX Market Weekly

Illiquidity Capped Movements on Developed Currencies; BoE Maintained Status Quo; Asian Currencies Broadly Strengthened

Highlights

¨    UST took a slight breather after reacting strongly to the dovish FOMC minutes yesterday but yield movements remained muted. The unattractive yield levels from the 30y UST auction (cut-off: 3.074%; USD13bn) left investors on the sidelines; it garnered a BTC of 2.40x (previously: 2.67x). The USD recovered earlier losses but capped by market illiquidity; GBP and EUR continued to slide against the USD, unsettled by Eurozone’s sluggish growth prospects. The shortlived EUR northward climb tripped at 1.279 levels, backing down towards 1.2664 as fresh sellers emerged. Over in UK, BoE maintained benchmark rates and its asset purchase plan in line with market expectations; investors continue to expect BoE to kickstart the policy normalization process.

¨    Asian currencies were broadly higher against the USD, led by KRW and MYR. While we see limited gains in corresponding pairs given the better USD, the MYR could sustain its near-term appreciation as Malaysia’s budget tabled today may broadly convey government’s better stand towards 3% deficit-to-GDP target in 2015, while August’s IP data is expected to rebound to 5.1%. Meanwhile, China announced plans to offer CNY640bn of additional quotas for global funds to tap into higher yielding onshore CGBs, that was deemed attractive with c.+100bps spread vs its CNH sovereign counterpart. When implemented, we expect the offshore vs onshore spreads to narrow, which could prove beneficial to the short-to-belly curve. The new scheme further support our mild overweight call on CGBs vs CNH govies.

¨    USDMYR rallied to 3.2329 this week, aided by the brief USD weakness. Malaysia’s budget due later today is expected to remain fiscal positive; MYR to relatively resilient against the USD given the sound fundamentals and central bank policies. Short term inflation spikes post-GST implementation should remain manageable; expect the next 25bps OPR hike to occur only as early as 1Q15.