FW: RHB FIC Rates & FX Market Update - 31/10/14

31 October 2014

Rates & FX Market Update

US 3Q GDP Buttressed FOMC’s Optimistic View; Germany and Spain’s CPI Undershot Expectations Weighing on Risk Sentiment

Highlights

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¨    USD climbed higher, boosted by a firm 3Q GDP, marginally lower 4-week initial jobless claims, strong government spending and a narrowing trade deficit which buttressed FOMC’s optimistic view. Investors’ elevated expectations for domestic consumption to underpin 4Q’s growth going into the festive season could be further complemented by lower oil prices. Optimistic US recovery expectations should improve investors’ risk appetite towards high yield bonds; demand for the 7y UST new issue was soft (ytm: 2.018%), garnering the lowest BTC since November 2013 at 2.42x. On the flip side, risk aversion was seen in the Eurozone as investors sought safer core EGBs as CPI prints from Spain and Germany stoked investors’ anxiety on EU’s deflationary problem; the heavy data week ahead may push the delicate EURUSD lower towards its 1.25 support. In Japan, Kuroda continues to face struggles towards BoJ’s 2% CPI target in 2015, where September’s print eased towards 1.0% net sales tax impact.

¨    The Thai Finance Ministry cuts 2014’s mid-point growth forecast from 2.0 to 1.4%, as Thailand grapples with weak export growth, expected to grow only by 0.1%, down from earlier forecast of 1.5%; volatility in USDTHB to remain suppressed. BI announced measures to guard against FX volatility in anticipation of Fed’s rate hike in 2015, aiming to limit volatility at  c.10% alongside new hedging and liquidity rules for private firms. BI governor urged the government to implement a fixed fuel subsidy scheme with a cap on volume of fuel subsidized; IDR lost 0.46% overnight against the appreciating USD.

¨    We expect BoJ to maintain their dovish tilt, with a high likelihood for BoJ’s median economic and inflation forecast to be revised lower as easing CPI in September fuels concerns on BoJ missing its 2015 target. We expect USDJPY to break the 110 resistance next week, propelled by expectations for BoJ easing measures and selling pressures on the JPY as pension funds continue to favour overseas allocation.

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