RHB FIC Rates & FX Market Update - 10/4/15

10 April 2015

Rates & FX Market Update

Investors Redirect Attention to Greek Reforms Proposal Following Debt Payment to IMF; Brief Strength in AUD Likely to be Short-lived

Highlights

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¨    The lower than expected jobless claims partly offset the weaker sentiment from the jobs data released last week, lifting yields on USTs higher by 2-7bps as investors began to look beyond the FOMC’s divided views. While yields at the 30y auction were evidently lower at 2.60% (March: 2.68%), demand remained similar to previous auction with a BTC of 2.18x, anchored primarily by foreign demand (51.3%). Over in UK, GBP fell to 1.471/USD as electoral uncertainty mounts while BoE left rates unchanged, with investors convinced of a 2016 BoE rate hike on the cards, likely keeping spreads between 10y UST and Gilt near its all- time high at 39bps in the near term. Positive German data and Greece’s debt payment to IMF failed to support a rally in the EUR and peripheral EGBs as investors remained jittery over Greek reforms proposal.

¨    RBA’s efforts to devalue the AUD were apparent given the surge in its foreign reserves which rose to AUD74.5bn (+AUD10.2bn) where we expect the recent reprieve in the AUD to be momentary as investors continue to price further RBA rate cut in May. In Korea, we saw firm demand in the KTB space despite BoK standing pat yesterday, which drove yields on 3y lower by 4bps, below the 1.75% repo rate, signaling investors’ firm expectation for another BoK rate cut this year despite the elevated household debt. Else, IDR outperformed Asian currencies, appreciating to 12,905/USD (+0.40%) as Indonesia reiterates its rule issued since March 31, banning onshore foreign currency transactions where we opine is likely to remain supportive of the IDR in the long term. 

¨    USDKRW traded stable as BoK’s decision to hold rates was within expectations. The weaker growth and elevating household debt poses a challenge to BoK, as it revises its 2015 GDP and CPI forecast lower to 3.1% and 0.9% (previous: 3.4% and 1.9%). We expect KRW to edge higher to 1180/USD by YE15, with strong external balances unlikely to buoy strength in KRW given the softer growth prospects.

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