RHB FIC Rates & FX Market Update - 21/5/15

21 May 2015

Rates & FX Market Update

June Fed Rate Hike Off The Cards; Muted Demand Expected at 15y Gilt Auction; Indonesia FY16 Growth Highlights Downside Risks  

Highlights

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¨    USTs rebounded after April’s FOMC minutes affirmed a pushback of the Fed’s rate hike expectations towards September. Fed members remains concerned over downside risks and the USD strength which could weigh on US exports, particularly against the negative interest rate backdrop in Europe. Even as market data suggests a further delay of FFR hike towards December, we opine some decoupling between UST movements and the actual FFR hike, with rates to exhibit front-running characteristics; maintain YE15 10y UST at 2.65%. The unanimous decision among BoE members to hold rates was accompanied by some optimism towards the improving economic slack which may intensify price pressures and policy tightening within the year. We expect upward yield pressures on GILT following the slightly hawkish BoE minutes which may dampen demand for the 15y Gilt auction later today. Aside, markets continued to digest ECB’s possible decision to frontload purchases pressuring the EURUSD lower but failed to lift EGBs as Greece warned that it could default on its payments should no aid be provided on the IMF payments due June 5. We opine any heightened volatility responses in P.EGBs to be short-lived given a low contagion risk from Greek woes.

¨    Asia data releases were relatively muted WTD; IndoGBs underperformed post-budget draft which indicated a lower growth assumption of 5.8-6.2% for FY16 (FY15: 6.3-6.9%) primarily driven by infrastructure investment. Risks to Indonesia remains tilted to the downside where we aim to review our neutral IndoGBs duration call heading into 2H15 on the back of higher supply; maintain mildly bearish IDR call  on the back of at least one 25bps rate cut over the next 12 months..

¨    KRW underperformed ahead of the BoK Quarterly FX Report where the quicker pace of JPY depreciation continued to weigh on Korea’s subdued recovery. We opine any major appreciation on the KRW to warrant further BoK FX intervention and add to the likelihood of an additional BoK rate cut in 2H15.

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