RHB FIC Rates & FX Market Update - 19/05/15

19 May 2015

Rates & FX Market Update

Renewed Sell-off in EGBs Seen Spreading into DM Govies Amid Lack of Event Drivers

Highlights

¨   USTs pared gains from previous day’s close as markets took cue from the renewed sell-off in EGBs, alongside an uneventful Monday in the US. Despite the bearish movements in DM govies, the Dollar index staged a 1.17% rebound against major crosses partly due to heightening worries on the elusive Greek bailout deal in the Eurozone, to hand out EUR1.5bn to the IMF in June. At this juncture, we hold a mildly bearish view on the EUR as expectations for a slower inflation in April may limit a stronger momentum for a EUR upside, despite its bullish trend. Over in Australia, ACGB yields fell as Deputy Governor Lowe conveyed RBA’s stance to retain its scope for further easing to aid the economy’s transition. In line with this, we expect a slight pullback in AUD over the immediate term as well as downward yield pressures on ACGBs as RBA minutes released today further extended the central bank’s emphasis on its preference for a weaker AUD; it stood above its 10-Day MA of 0.7987 prior to the minutes release.

¨   Separately, Japan industrial production contracted 1.7% y-o-y in March (Feb: -1.2%), which may have capped market optimism ahead of the 1Q15 GDP data later today; JGB yields modestly fell while the JPY weakened 0.48% against the USD. We expect the USDJPY to trade at a range of 118.5-120.5 over the near-term, given looming sentiment towards the delay in the Fed’s tightening alongside sustained skepticism on Japan achieving its 2% inflation target in the absence of additional stimulus. Meanwhile, investors shrugged the better 1Q15 growth print in Singapore, as SGD fell 0.55% overnight where USD remained the dominant driver between the pair.

¨   The broad selloff in EGBs triggered a 1.1% pullback in the EUR overnight. While we believe a bearish trend remains benign at this juncture, an immediate term downward pressure could likely be supported by subdued inflation expectations in the Eurozone. Thus, we maintain a mildly bearish view on the EURUSD pair.