RHB FIC Rates & FX Market Update - 28/5/15

28 May 2015

Rates & FX Market Update

UK Maintains Fiscal Consolidation Plans; BoE Reduces Meeting Frequency; JPY at All-time Low; Concerns Over China Supply Risk

Highlights

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¨    The UST flattening trend persisted amid month-end duration extension trades; the strong 5y UST auction sold at 1.56%, highest since December 2014 and anchored by non-primary dealers (BTC:2.46x vs prior 2.35x). Technicals suggest similar demand at the 7y UST auction on top of some risk aversion towards European assets. In UK, although no major new measures were introduced via the Queen’s speech at the state opening of the new parliament, it highlighted the focal points for the UK government in the year ahead, including the EU referendum and further public spending cuts in line with its fiscal consolidation plans alongside a tax lock bill. This further reinforces our view for a delay in BoE’s rate lifoff towards 2016. Additionally, a bill will be introduced to allow BoE to align both the MPC meeting and inflation report publication, and reduce the frequency of MPC meetings from 12 to 8 per annum on top of joint MPC and FPC minutes. Gilts traded fairly stable overnight amid rising expectations for a pushed back BoE rate hike to 2016. Elsewhere in EU, EGBs remained sentiment driven by Greek debt developments as peripheral EGBs posted strong gains following Germany’s affirmation that Greece is likely to be able to repay its EUR300m debt. Optimism from positive GDP prints from peripheral EU due later this week is likely to continue supporting gains on peripheral EGBs.

¨    In Asia, China’s CGB curve bear steepened as investors begun to raise concerns on the high bond supply risk in China following several successful auctions by the Chinese local governments. We expect the influx of supply to weigh on the long end of CGB curve but for further PBoC easing to keep short end rates anchored. 

¨    JPYKRW pushed lower to its all-time low of 8.9398, testing BoK’s tolerance for the weaker JPY. Concerns of declining export competitiveness may compel BoK to intervene in the FX market, with its quarterly report citing an average rate of 9.24 as a tolerable range for Korean exporters. We look to enter long position on this pair as it trades close to its support of 8.8761.

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