FW: RHB FIC Rates & FX Market Update - 18/02/15

18 February 2015

Rates & FX Market Update

Bank Indonesia Surprises with an Earlier Than Expected Rate Cut

Highlights

¨   Asian markets are expected to remain quiet for the rest of the week with financial markets closed for the Lunar New Year. BI surprised with an earlier than expected 25bps reference and deposit rate cut following the revised budget and expectations for CPI to trend lower (YE15(f) at lower bound of 4±1%). While this optimistic move seeks to support growth and ease tight liquidity conditions, a premature cut may exacerbate the weakness in external accounts. Additionally, BI’s statement hints further cuts on the books if conditions remains conducive; USDIDR gapped 0.4% higher at open while the NDF markets were comparatively muted, 10y up 6bps to 7.37% in response with better buying at short end. South Korea’s central bank stood pat, citing concerns on low efficacy from rate cuts and elevated household debt; the KTB curve flattened as investors continued to pen in further easing as economic growth remains fairly sedated.

¨   UST yields continued to climb (+2-9bps) on consensus expectations for the FOMC’s January meeting minutes to exhibit a hawkish tilt, underpinned by strong jobs data. Aside, Gilts tracked UST yields higher, undeterred by the softer CPI print; BoE governor Carney previously warned for CPI to ease below zero in the months. Else, yield movements in EGBs were fairly muted even as Greece bailout talks continued to dominate the headlines in Europe, where we recommend for investors to focus on the better rated peripheral EGBS, amid volatility in the European bond market.

¨   JPY depreciated to 119.25/USD (-0.66%) ahead of the BoJ monetary policy decision due today. While BoJ has earlier dismissed further stimulus as counterproductive, we opine for Kuroda to likely keep the option open supporting strength in JPY as BoJ assesses the impact of the uneven global recovery alongside growth dampening impact from fiscal consolidation efforts by Abe.