Thursday, February 12, 2015

FW: RHB FIC Rates & FX Market Update - 11/2/15


11 February 2015


Rates & FX Market Update


Improving Risk Appetite on Greek Compromise; Offshore Interest for 3y UST Auction Highest in 5 years; Modi Loses New Delhi State Elections

Highlights
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¨    The 3y UST auction received the strongest demand from offshore investors in nearly 5 years (indirect bidders: 48.9% vs 45.8%) drawing a BTC of 3.34x vs the prior 10 auction average BTC of 3.29x, with an average yield of 1.02% (+12bps from last auction) despite Fed’s Lacker’s hawkish remark and improving risk appetite. Meanwhile, Gilt curve bear steepened while GBPUSD edged higher, buoyed by upbeat manufacturing data. However, we remain mildly bearish on the GBP with UK elections to cloud sentiment; mild-overweight Gilts on expectations for BoE rate hike delay. Aside, short dated EGB yields edged lower as risk appetite improved with Greek Finance Minister, Varoufakis, possibly open to a compromise by implementing 70% of the reforms stipulated in the current bailout program while the remaining 30% is to be discussed with the OECD; we maintain a mild overweight stance on peripheral sovereigns on improving risk appetite.
¨    Softer CPI fuelled sentiment on further PBoC easing, particularly after the release of 4Q PBoC monetary report which rescinded early aversion towards easing where we remain mild overweight on CGBs with expectations for gains on CGBs as optimism on PBoC rate cut propagates. USDMYR broke above the 3.5655 resistance despite strong IP data, weighed down by pullback in oil prices while 4Q14 GDP is likely to be non-mover. Else, GSecs yields were marginally higher on concerns Modi’s loss at Delhi state elections would impede on ambitious reforms where we opine for Gsecs and INR to be pressured over the near term.  
¨    JPY edged higher to 119.44/USD, largely driven by the stronger USD on improving risk sentiment from the EU. Increasing tolerance of a weaker JPY seen in the G20 summit alongside encouraging economic data should remain supportive of the midyear Fed rate hike, underscoring the Fed-BoJ monetary policy divergence. As such, expect the USDJPY to drift higher towards our YE15 target of 125.
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