RHB FIC Rates & FX Market Update - 22/6/15

22 June 2015

Rates & FX Market Update

Volatility to Remain Elevated Amid a Lack of Greek Resolution; BoJ Announces New MPM Framework; BoT Cut 2015 GDP Forecasts

Highlights

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¨    DM bonds extended gains alongside a further pushback in FFR liftoff expectations. Investors to remain fixated on Greek developments ahead of its 30 June Euro Area backed bailouts expiry. While contagion risks remain low in our opinion, a lack of resolution is likely to result in continued volatility among the P.EGBs and further risk aversion flows. EURUSD was little changed on Friday where we remain mildly bearish on the EUR heading into 2H15 given the region’s subdued inflation and anemic recovery amid the central bank’s QE program. Turning to Japan, BoJ left policy intact but announced a new MPM framework wef January 2016: (i) MPM meetings will lessen from 14 to 8 per annum; (ii) outlook reports will reduce from 4 to 2; (iii) a new “summary of opinions” one week post MPM; and (iv) the disclosure of individual GDP and CPI forecasts for each of the 9 members. These changes are likely to be welcomed by investors; USDJPY likely to remain undervalued in REER terms alongside range bound JGB yields.

¨    In Asia, we anticipate China’s manufacturing PMI print which is expected to extend into another month of contraction. This reinforces prospects of further PBoC rate cuts and remains supportive for CGBs. Externalities on HKGBs from the rejection of the China-backed bill remains muted but could weigh on Hong Kong’s fundamentals; maintain underweight HKGBs. Elsewhere, BoT cut 2015 GDP growth forecasts from 3.8% to 3.0% driven by weak exports (-1.5% vs +0.8%); maintain possibility of another 25bps cut in Thailand and favour short to belly ThaiGBs..

¨    The MYR retreated back above 3.74/USD levels, relinquishing much of last week’s brief respite as markets remained wary over Fitch’s impending sovereign review. USD to remain the key driver of the USDMYR pair;  expectations for better US data could drive the pair higher in line with  our tactical long USDMYR position introduced last week with a target of 3.7786.

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