FW: RHB FIC Rates & FX Market Update - 13/11/14

13 November 2014

Rates & FX Market Update

Pullback in GBP as BoE Pushes Out Rate Hike Expectations to 4Q15; Sharp Decline in India’s CPI Bolsters Rate Cut Chatters

Highlights

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¨    Mixed DM currencies movements overnight amid tepid market conditions; EURUSD inched lower on ECB Weidmann’s caution on QE risks but held up against the depreciating GBP which fell to a 14 month low of 1.577/USD following its quarterly inflation report. BoE lowered its growth and inflation forecasts in its latest quarterly inflation report, overshadowing better earnings growth and job creation in September. Dovish expectations for CPI to dip below 1% in the next 6 months prompted investors to delay BoE’s rate hike expectations towards 4Q15, where the bank urged for investors to focus on the medium term pace of increments. We opine that the gradual divergence between Fed and BoE monetary policy standpoint will likely weigh on the GBPUSD while keeping yields on Gilts lower for a longer period, outperforming the USTs in 1H15. Back to the US, the USD24bn 10y UST auction met relatively weaker demand, selling at 2.365% (BTC of 2.52x vs Avg of 2.7x), where we expect indirect buying demand for USTs to cap any major upward shift in yields given the delicate geopolitical backdrop.

¨    In Asia, KRW hovered close to its 1,100 resistance, ahead of BoK’s decision to keep rates unchanged at 2% this morning. The bank acknowledged the Won’s strength against the JPY, the country’s sluggish economic sentiment and a lower inflation print in the coming year; we remain neutral on both the USDKRW and KTB at this juncture. Elsewhere, the INR remained steady where increasing expectations for RBI to cut rates following the sharp decline in CPI (Oct: 5.52%; Sep: 6.46%) could bolster further offshore demand for Gsecs and the INR.

¨    GBPUSD slipped to a 14 month low at 1.577 as BoE revised inflation rate lower to 1.2% and 1.4% 2014 and 2015 respectively. This delayed BoE rate hike expectations towards 4Q15.  In addition, BoE has also cut its growth forecast to 2.9% and 2.6% in 2015 and 2016. While technicals indicated strong bids at 1.575, a break below this level could signal an extended GBP decline towards 1.56/USD.

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