RHB FIC Rates & FX Market Update - 18/5/15

18 May 2015

Rates & FX Market Update

Risk Aversion Supports DM Govie Markets; MYR Stronger Despite Lingering Concerns

Highlights

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¨    Treasuries gained overnight as risk averse sentiment continued to cloud the US market, following the unexpectedly weaker US industrial production and lower consumer confidence. The persistently disappointing data remains a hindrance to market’s earlier rate normalisation expectations, where we again expect the unwinding of long USD positions to continue driving UST yields and the DXY lower this week. Over in Europe, EGBs broadly rallied as investors continued to digest Draghi’s assurance that the recent bond rout will not derail ECBs full implementation of the PSPP. Over the weekend, Fitch reaffirmed Greece’s sovereign rating at CCC, premised on the base case that Greece will reach a compromise deal with its creditors, while a default remains a possibility as it prepares to pay EUR1.5bn to the IMF in June.

¨    Over in Asia, KRW staged a relief rally (+0.44%) overnight, in response to BoK’s status quo decision despite initial expectations for a rate cut. In the Philippines, PHP gained 0.28% to 44.4/USD following the stronger overseas remittance print on Friday. Hence, PHP is expected to derive support in tandem with central bank reserves which rose to USD80.8bn in April. Over in Malaysia, investors remain unfazed by lingering concerns over Moody’s comments on the implications of a 1MDB loan default to Malaysia’s fiscal target, as MGS and MYR saw overnight gains. We believe the downside risks emanating from a potential Fitch downgrade may have already been largely priced in given returning carry trades into EM Asia, reflecting the stronger foreign inflows into the MGS space in (April: +MYR6.1bn; March: +MYR5.7bn). Meanwhile, IDR fell 0.22% to 13,084 as Indonesia’s trade balance narrowed to USD454m from USD1.03bn in March.  

¨    The AUD failed to capitalize on the broad weakness of the USD and firmer commodity prices as the pair hovers near the current resistance. Moving forward, we can expect some downward pressures this week to low 0.79-levels as RBA’s Lowe confirmed the central bank’s easing bias ahead of meeting minutes which could provide further clues to the cycle.