RHB FIC Rates & FX Market Weekly - 15/5/15

15 May 2015

Rates & FX Market Weekly

FOMC Minutes to Echo 1Q15 Economic Blip; BI to Remain on Hold Amid Renewed Inflationary Pressures

Highlights

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¨    Global Markets: April’s FOMC minutes is expected to echo a relatively downbeat economic assessment for US over 1Q15. Similarly, BoE minutes are also expected to adopt a dovish tone given the downward revision to its official GDP forecast and Mark Carney’s reiteration that inflation could turn negative in the coming months. The latter was in line with broad expectations of the UK inflation to remain subdued at 0% in April. Over in Eurozone, expectations for a subdued Euro-region CPI in April and the softer preliminary PMI releases PMI could support some short-lived EGB retracement where we believe the sell-off is overdone. Over in Japan, we see a heavy data week ahead where investors are expected to scrutinize 1Q GDP and April’s trade data prints. Although the economic data is unlikely to sway BoJ’s decision due towards the end of the week, we expect any disappointment in GDP to reinforce expectations for further BoJ easing, dampening downward pressures on the USDJPY pair. Moving to Australia, we look towards RBA’s May meeting minutes in a bid to scour further hints of further possibilities of the central bank maintaining its easing bias. Should this materialize, we can expect demand to be supported at the 2018 and 2026 auctions. Nevertheless, the AUDUSD should trade within the 0.815-0.825 range on the back of firmer commodity prices amid a week lack of data drivers.

¨    AxJ Markets: In China, demand for the 7y and 50y CGBs are likely to remain strong as PBoC rate and RRR cuts remain on the cards; a contraction print in the HSBC manufacturing PMI could bolster further gains in CGBs. Elsewhere, movements on SGS are likely to shrug off the final print on Singapore’s GDP while impact from Hong Kong’s stable unemployment rate and elevated CPI are likely to remain marginal on HKGBs, with both of the developed AxJ bloc bonds likely to take directional cues from the USTs as investors scour for clues on Fed’s assessment of the economy from the FOMC minutes. Aside, demand for the two 10y KTB reopenings may be slightly weaker than average as low expectations for another BoK rate cut amid the global bond rout may dampen appetite for duration in KTBs. Moving to Thailand, we anticipate 1Q GDP figures where we expect a marginally higher print and likely to miss expectations for 3.4% y-o-y expansion on the back of slowing manufacturing activity alongside tepid consumer sentiment. As such, we expect bearish pressure to remain on the THB against the USD where the pair could trade higher at near 31.4 levels while the 30y ThaiGB auction may garner some demand.  Bank Indonesia will reconvene in the week ahead where we expect the bank to remain on hold on the back of renewed inflationary pressures, a weakening IDR and firmer global oil prices; expect USDIDR to edge higher towards its near term resistance of 13,204 while investors remain jittery over IndoGBs amid diminishing appetite for global govies. Over to India, expect a light calendar week while investors continue to price in a rate cut in June as inflationary pressures continue to diminish, lending support to GoISecs on the primary front.    

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¨            Selected Trade Reviews:

¨    Trade Idea: UST 2/5y Flattener (Current: 94bps; Entry: 95bps; Stop Loss: 130bps; Target: 59bps)

¨            Soft data releases have undermined the probability of any V-shaped or similar recovery in US, providing a drive to mild UST flattener.

¨    Trade Idea: Long 2y ThaiGB vs 2y UST (Current: 99bps; Entry: 153bps; Stop Loss: 210bps; Target: 90bps)

¨            Take profit on the position; little compelling reason for investors to revisit this trade position given the thin ThaiGB liquidity and expectations for a softer THB.

¨    Trade Idea: Short AUDSGD (Current: 1.0643; Entry : 1.1286; Stop Loss: 1.1544; Target: 1.0100)

¨            AUD’s reprieve to be short-lived given its overvaluation against its longer term REER trend.

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¨            Weekly Positioning

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¨	¨                  Rates	¨                  FX
¨                  Overweight	¨	¨
¨                  Mild Overweight	¨                  GILT, P. EGB, ACGB, CGB, ThaiGB, IndoGB, GolSec	¨                  USD
¨                  Neutral	¨                  UST, C.EGB, SGS, KTB, MGS	¨                  GBP, HKD, MYR, INR
¨                  Mild Underweight	¨                  RPGB	¨                  EUR, AUD, JPY, SGD, KRW, CNY, PHP, THB, IDR
¨                  Underweight	¨                  JGB, HKGB	¨