RHB FIC Rates & FX Market Update - 26/6/15

26 June 2015

Rates & FX Market Update

Softer Primary UST Demand As Fed Rate Liftoff Draws Closer; South Korea Announces KRW15trn Supplementary Spending to Boost Growth

Highlights

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¨    The softer demand at the 7y UST auction (cutoff yield: 2.15%; BTC: 2.38x) concluded UST auctions totaling USD90bn this week. Primary demand eased this week despite higher cut-off yields as investors begin to price in Fed’s impending rate hike against a backdrop of encouraging data releases, including stronger consumer spending seen in May. Post auction, USTs returned earlier gains, with yields on 10y climbing back above 2.40%. Over in EU, investors were unfazed by yet another deadlock on the Greek debt front with yields on P.EGB declined and EUR steady at 1.12/USD as investors downplayed the IMF deadline given concessions for the debt to be in arrears; we channel keen focus towards 20 July ECB deadline instead.

¨    Japan’s CPI eased to 0.5% y-o-y in May (April: 0.6%), where the subdued print is likely to be shrugged off; expect USDJPY to remain in its 122-125 range. In South Korea, KTB yields edged 1-3bps higher following the government’s announcement of KRW15trn fiscal stimulus to cushion negative impact from the MERS outbreak. With KTB issuances behind schedule, we expect additional supply to result in a steeper curve over the near to medium term with the short end supported by BoK’s dovish stance. Elsewhere, PBoC remains committed to limit FX interventions, pledging to increase the transparency of FX policies by increasing the amount of data releases by the end of the year. USDCNY held steady at 6.21; maintain neutral to mildly bearish on CNY, underscored by expectations for another 50-75bps PBoC rate cut as growth falls short of its 7.0% target. 

¨    South Korea’s draft stimulus revealed plans to increase fiscal spending by KRW15trn (c.1.0% of GDP) to cushion the impact of MERS on the weakening domestic economy. 2015 GDP forecast was also revised lower to 3.1%. Further BoK easing should complement fiscal easing, where we continue to pair short KRW positions vs USD and JPY.

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