RHB FIC Rates & FX Market Update - 1/6/15

1 June 2015

Rates & FX Market Update

US Economy Contracted in 1Q; Investor Sentiment to be Driven by Greek Debt Developments; MYR Underperformed 

Highlights

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¨    UST curve gapped lower as the US economy contracted by 0.7% in the 1Q while personal consumption failed to meet initial estimates, pushing back expectations for Fed’s rate lift off. With Yellen leaving the door open for a rate hike this year, we can expect UST yields to trend higher later today on expectations for higher manufacturing prints; maintain neutral duration on USTs. DM currencies were broadly mixed, failing to capitalize on the weaker USD while the EUR outperformed DM peers. Regardless, our longer term bearish EUR call remains unchanged given the region’s subdued inflation, sluggish recovery and ongoing QE. Outperformances were seen among long dated core EGBs as safe haven bids persisted amid Spanish election jitters alongside Greek default fears where Greece has failed to find approval with creditors to access bailout funds. Elsewhere, the ACGB curve bull steepened ahead of RBA’s meeting tomorrow where we expect the central bank to stand pat while remaining dovish.

¨    In Asia, while India’s 1Q GDP met initial expectations of 7.5%, GoISec yields edged lower, suggesting rising rate cut expectations ahead of RBI’s meeting tomorrow where we expect a 25bps cut to the repo rate on subdued inflation. Aside, South Korea’s trade surplus shrank on weaker exports while manufacturing remained in contraction (May PMI: 47.8). Weaker export prints are likely to fuel economic concerns, intensifying further BoK rate cut expectations. Lastly, we expect concerns for slowing manufacturing in China to be offset by upbeat services PMI tomorrow while investors will likely focus on govie over supply risks.  

¨    USDMYR underperformed on Friday where we opine, MYR will remain vulnerable to sentiment driven volatility, given the persistent political noise as well as expectations for upbeat US data. Expectations for further deterioration in the Malaysian trade surplus should see further upside pressures to the pair over the near term.

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