RHB FIC Rates & FX Market Update - 20/05/15

20 May 2015

Rates & FX Market Update

GBP Weakened in Response to the Weak CPI Data; Attention to Shift to FOMC Minutes; BI Held Rates Amid Heightened Market Volatility

Highlights

¨   UST yields continued to rise overnight following a surge in housing starts in April to its 7y high of 1135k, signaling a receding slowdown from the cold weather and supporting a stronger USD ahead of the FOMC minutes. By contrast, EGBs climbed as ECB’s executive board member, Benoit Coeure suggested that the ECB could accelerate bond purchases in lieu of subdued inflationary pressures and tight liquidity particularly during the summer period. Resultantly, P.EGB outperformed in line with our tactical long BTP call. EURUSD weakened after Coeure’s comments but failed to breach its near term support of 1.1117, attracting renewed EUR short positions. In UK, the poor UK inflation data is likely to delay BoE rate hike expectations, a constructive support for Gilts.

¨   Turning to Japan, 1Q GDP data printed on the upside, premised on improving business activity but upcoming FOMC minutes suggest heightened uncertainty for the USDJPY, leaving us on the sidelines for any tactical or medium term trades for now. In Asia, IndoGB yields were marginally higher while the IDR broke below 13200/USD levels as BI held rates last night on renewed inflationary expectations but decided to relax macro prudential policies in a bid to stimulate the economy. Elsewhere, Thailand issued a public referendum on the new constitution is likely to prolong the country’s economic recovery as the Junta pushed back February elections to August 2016; the THB was weaker against the stronger USD and is likely to weigh on investor sentiment.

¨   The GBPUSD pulled back from November 2014 highs, falling below its 200day MA (1.5590), in response to the poor inflationary data signaling the first in over 50 years. While the data highlights seasonal distortions, headline CPI is expected to remain subdued for FY15, and aligned with our call for a delay in BoE rate hike towards 2016.