RHB FIC Rates & FX Market Update - 1/4/15

1 April 2015

Rates & FX Market Update

USD to Remain Choppy Amid Shortened Weak; China Takes Another Encouraging Interest Rate Liberalization Step

Highlights

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¨    USTs continued to climb for the fourth straight day, shrugging off hawkish comments from Fed’s Lacker who asserted a June rate hike supported by strong recovery signals; 5/30y spreads (117bps) widened closer towards the peaks seen in 2M15 (c.120bps). USD movements remain exaggerated by thin liquidity, likely to persist through the short Easter week. Meanwhile, GBP appreciated against the stronger USD, boosted by the surprise upside on UK’s 4Q GDP. We however turn mildly bearish on GBP ahead of elections due in May; short term volatility continues to suggest higher GBP risks being priced in versus the last elections in 2010. 10y EGB yields declined 2-8bps on continued Greek doldrums lacking progress and supported by ongoing demand from ECB’s PSPP. Else, Japan’s 1Q Tankan survey indicated the slower than expected manufacturing activity was likely offset by a stronger services sector, offering some reprieve to the weak JPY.

¨    Despite South Korea’s widening trade surplus masked by a larger decline in imports, trade weakness compounded on the weak IP raised speculations for another BoK rate cut, bolstering support among short dated KTBs. Meanwhile, China takes another positive step towards the full liberalization of bank deposit rates with the implementation of a deposit insurance scheme up to CNY500k wef 1 May. This scheme has been widely anticipated by investors and would likely be a precursor to the removal of deposit rate ceiling speculated by EY15 which should inch closer towards market levels. 

¨    Sentiment on AUD was weighed by the weak commodity prices, hovering near its 6y low of 0.7561/USD. Short AUD positions were interrupted by the better than expected Chinese PMI where we see the prospects of an additional rate cut by RBA and a wider trade deficit to keep the AUD suppressed, maintaining our medium term mildly bearish view on AUD, with a YE15 target of 0.73/USD.

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