RHB FIC Rates & FX Market Update - 12/3/15

12 March 2015

Rates & FX Market Update

USD Sustained Rally Ahead of the FOMC Meeting; BoT & BoK Cut Interest Rates Amid Softer Growth

Highlights

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¨    Strong demand was seen for 10y UST reopening, with a cutoff yield of 2.14% (previous: 2.00), boosted by high foreign demand (58.6% vs 59.5%) even as the relative attractiveness of USTs drove yields lower. USD strengthened against major crosses ahead of FOMC meeting, where we opine for strength in USD to be sustained, particularly against EUR on monetary policy divergence and AUD as RBA continues to reiterate its overvaluation as investors shrugged off the modest improvement in Australia’s unemployment. Meanwhile, EGB curves continued to bull flatten, where we highlight yields on short dated OATs bordering ECB’s -0.2% purchase limit, which challenged ECB’s QE program in its first month of asset purchase, suggesting a potential ECB rate cut.

¨    ThaiGB curve bull flattened while THB edged higher to 32.895 (+0.55%), as weak exports and negative CPI print cemented BoT’s 25bps rate cut. BoT’s tone remains tilted to the dovish side, which may suggest for further easing should slow disbursement of budget funds and export growth continue to disappoint. Aside, weaker than expected Chinese retail sales and industrial production built the case for additional stimulus measures from PBoC, buoying gains in CGBs, where we maintain our view for another 25bps rate cut in 2H15. China will also push through SoE reforms by reducing government’s stake and improving efficiency. Else, BoK 25bps rate cut was within expectations despite elevating household debt, where we expect KRW to trade on a softer note today, dampened by the diverging monetary policy with the US Fed. MYR saw relief rally (+0.18%) to 3.697/USD, as investors have priced in BNM’s slower growth outlook in 2015 following MoF’s growth revision in light of the budget adjustment. 

¨    GBP broke its 1.50/USD support as the softer IP growth may indicate a less upbeat 1Q14 GDP and BoE to remain cautious on tightening too soon. BoE’s Weale comments also suggest that the softer CPI from oil prices allows less haste in BoE rate hike where we expect GBPUSD to remain soft in the near term, expressing our preference for GBP against the weaker EUR.

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