FW: RHB FIC Rates & FX Market Update - 13/10/14

13 October 2014

Rates & FX Market Update

Uneven Growth Trajectory May Implicate Decision from Central Banks; Malaysia FY15 Budget Continues to Signal Fiscal Prudence

Highlights

¨    IMF meetings over the weekend highlighted concerns over the global growth outlook where Fed Vice-chair, Fischer, suggested may threaten to delay Fed’s rate normalization plans. The uneven growth trajectory is likely to complicate central banks decision, hinting at a prolonged period of accommodative policies. Aside, the slowing Chinese growth was debated (official projection unchanged at 7.5%) and concluded as a healthy correction given the ongoing structural reforms, suggesting the continued need for prudent monetary policy. The softer market risk appetite extended through to Friday, DM and European govies mostly gained with the latter further supported by the contracting IP prints from France, Italy and Greece. Additionally, France’s outlook was downgraded by S&P to negative from stable on concerns that the economy is losing steam.

¨    Despite the strong USD, JPY extended gains towards 107.5/USD on safe haven demand while Asian currencies returned earlier gains. KRW down 0.57% against USD, 3y KTB yields fell 10bps ahead of the 5y reopening given concerns over an overly accommodative central policy, eroding the relative attractiveness of KTBs; we maintain our expectations for the BoK to stand pat given the poor efficacy of rate cuts. USDMYR inched higher towards 3.26 levels pre-budget announcement where the budget continued to highlight fiscal consolidation plans while taking into account the higher cost of living; BNM emphasized an accommodative monetary policy to support growth and a normalizing price pressures towards the long term average of 3%.

¨    AUD bears persisted on Friday with better selling from hot money accounts. While we expect structural demand for the AUD to maintain over a longer horizon given its high carry, the improving allure of the USD is expected to offset some of this demand. Adding to Australia’s economic fragility includes a dovish RBA which underscores the vulnerability of the AUD and a weaker Chinese economy.