RHB FIC Rates & FX Market Update - 26/3/15

26 March 2015

Rates & FX Market Update

Lukewarm 5y UST Auction on Low Yields; IDR to Remain Vulnerable Over 2Q15 on Dollar Demand; Asian Central Banks Remains Dovish  

Highlights

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¨    Durable goods orders contracted unexpectedly, highlighting a slowdown in business spending on capital goods which further supported a delay in FFR hike; UST yields revisited January lows. Given the lower yields on USTs, demand for the 5y auction were comparable to July 2009 lows, suggesting a mid-1.30 hurdle for investors (YTM: 1.387%); demand from both fund managers (-2.8%) and indirect bidders (-4.4%) eased. We expect demand for the 7y to be similarly clipped by the low UST yields with a hurdle of c.1.70%. In Europe, upbeat German IFO surveys supported the EURUSD’s bullish momentum but the EUR relinquished some gains during the US session, suggesting ongoing profit taking and rebalancing post FOMC. Path of EURUSD remains largely hinged on the dollar’s fluctuations given the steady longer term depreciation path for the EUR.  

¨    Subdued Asian markets overnight, broad losses across Asian FX and govies. IDR led Asian FX losses on dollar demand while a dovish statement from BoT highlighting weaker than expected recovery weighed on the THB. Meanwhile, South Korea revised its 4Q14 GDP down from the 0.4% preliminary estimates to 0.3%, the slowest since 1Q09, impeded weak exports. The weak growth trajectory bolsters the case for further policy rate cuts and remains in line with our mildly bearish on the KRW, where we expect the USDKRW pair at 1,180 by YE15. Aside, China plans to ease QFII and RQFII investment restrictions as soon as May, allowing investors to engage in a wider scope of products, a constructive development for Chinese rates market and the CNY.

¨    USDIDR ended its short lived positive streak. BI shared 1Q15 GDP at 5.0-5.1%, steady from 4Q14 prints. The reprieve from tepid USD liquidity is unlikely to ease the negative longer term momentum on the USDIDR pair.  IDR remains vulnerable to external headwinds, particularly from the US, as well as seasonal weakening pressures from increased dollar demand over 2Q15 on dividend payments.

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