RHB FIC Rates & FX Market Update - 29/6/15

29 June 2015

Rates & FX Market Update

Greek Political Uncertainty to Drive Safe Haven Demand; Heightened EUR Downside Risks; PBoC Firmly in Easing Mode

Highlights

¨                   

¨    Greek PM Tspiras surprised with a referendum due 5 July; expect widening core-peripheral spreads amid higher volatility as investors re-price risks stemming from the Greek fallout. The ELA due on 26 June will not be increased but broad market stability remains hinged on the execution of ECB’s support which may result in quicker frontloading of PSPP purchases following wider regional spreads. Nevertheless, we continue to assign a low likelihood of contagion risks when taking into account the improving fundamentals among European economies but tight bond market liquidity may weigh on P.EGBs. The re-emergence of stronger risk-off sentiment should remain conducive for safer assets including USTs, JGBs and ACGBs. Similar trend expected in the FX market; stronger USD drove broad FX losses. AUD fell below its 0.765/USD support where we expect AUD bears to remain supported by expectations of a flat trade deficit print on Thursday.

¨    Elsewhere, PBoC cut the 1y lending and deposit rate by 25bps each to 4.85% and 2.00% respectively, alongside a 50bps RRR cut for selected banks. This followed PBoC’s issuance of 7 day reverse repo on 25 June to inject further liquidity, the first since April 2015, where 7 day repo rates have risen from 1.92% to 3.00% last week.  We continue to expect further easing from PBoC to cool the overheated financial market activity and ease growth concerns; remain tactical overweight short dated CGBs. Meanwhile, the weak Thai customs export highlights the need for further fiscal and monetary measures given the marginal impact from a softer THB over 2Q15 on exports.

¨    EURUSD broke below its 1.0995 support in an early trade following a shocking Greek move. Downside EUR pressures to linger given vulnerability to Greek uncertainty and heightened risk aversion. On contrary, USD to remain supported following upbeat labor data in the US.  Maintain short EURUSD position with a target of 1.0720. 

¨             

¨