RHB FIC Rates & FX Market Update - 9/4/15

9 April 2015

Rates & FX Market Update

FOMC Divided on Fed Rate Liftoff Timing; BoJ & BoK Maintained Status Quo; India’s Sovereign Outlook Upgraded to Positive by Moody’s

Highlights

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¨    UST yields edged higher as markets digested the mixed assessment by the FOMC members. The divide suggest investors will remain sensitized to US economic data, as FOMC participants were torn between a June, September 2015 and 2016 rate hike given different perceptions and impact of the soft oil prices and stronger USD on inflation trajectory. Meanwhile, structural offshore demand continued to support UST auctions where the recent 10y issuance remains relatively attractive versus developed peers despite printing at the low yield of 1.925% (BTC: 2.62x). Bunds gained as German factory orders unexpectedly fell in February, contrasting upbeat manufacturing data last week; expect volatility to spike among PEGBs and the EUR as markets eye Greek debt developments particularly with the EUR462m IMF loan repayment due today. Else, BoJ kept its annual QQE purchases at JPY80trn, where we opine that the path for easing may be open as inflation remains far from the central bank’s 2% target; we expect JGBs to continue trading at current range, with any upward yields to be marginal, suppressed by BoJ’s QQE.

¨    In Korea, BoK left rates unchanged at 1.75% this morning, likely held back by concerns of accelerating household debt accumulation; nonetheless, investors are likely to continue to factor in for a potential rate cut this year, keeping short dated KTB yields subdued at 1.8%. In India, Moody’s raised India’s sovereign rating outlook to positive (Baa3) citing a proactive government that has endeavored to establish a framework that would likely allow economic growth to outperform its similar-rated peers; the move favours our short EURINR call.  

¨    JPY remained sticky at 120/USD following BoJ’s decision to stand pat. The late April BoJ meeting remains in focus as BoJ is likely to reduce its CPI forecast further. We opine for the USDJPY to trade out of its consolidation phase towards our YE15 target of 125, spurred by further BoJ easing in 2H15, as the sluggish recovery challenges Kuroda’s optimistic portrayal of the Japan.

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