FW: RHB FIC Rates & FX Market Update - 8/10/14

8 October 2014

Rates & FX Market Update

Govies Broadly Gained Overnight As IMF Cuts Global Growth Outlook; RBA & BI Status Quo; Bearish EUR and AUD

Highlights

¨    USTs extended gains, bolstered by risk aversion demand following IMF’s reduction of global growth forecast for 2015 to 3.8% (-0.2%), factoring in the higher probability of the Eurozone sliding into deflation. Dovish comments from Dudley weighed further on both the USTs and USD, where he highlighted an earlier rate hike as premature given the amount of slack coupled with a low inflation, mirroring Kocherlakota’s views against a 2015 hike with as he opines inflation will be sub-2% through 2018. The gloomy sentiment supported a strong 3y UST auction which recorded a BTC of 3.42x, the highest since February 2014 with yields cut-off below 1.0% at 0.994% given the sizeable non-competitive bids. UK’s IP marked the third consecutive month of expansion, contrasting the declining trend in German IP. The EUR failed to sustain the jump garnered during the early European session which tested the 1.2683 levels, where we maintain our short EURUSD stance, preferring to sell on rallies. Separately, RBA repeated earlier rhetoric for a period of rate stability while acknowledging the weaker AUD albeit with little knock-on effect in the economy; ACGBs and AUD gained. In Asia, MYR held ground at 3.26 as Malaysia’s exports growth rebounded slightly to 1.7% y-o-y, beating estimates for 1.4% contraction. Elsewhere, BI left rates unchanged, while we still expect a pre-emptive move by the central bank to curb inflationary pressure from prospects of higher subsidized fuel prices; IDR stood firm at 12,205 while the 10y IndoGB rallied (-8bps).

¨     RBA kept rates unchanged in line with its guidance for a period of rate stability to support demand and economic recovery. Governor Stevens acknowledged the weaker AUD but suggested little knock-on impact in achieving a balanced growth. We maintain mildly bearish view on the AUD where recent gains may be shortlived; expect elevated volatility amid key releases (FOMC minutes, AU employment report) this week.