: RHB FIC Rates & FX Market Update - 30/6/15

30 June 2015

Rates & FX Market Update

Core-Peripheral EGB Spreads to Widen Further Amid Higher Volatility; RBA and BoK May be Compelled to Ease Further

Highlights

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¨    Investors continued to re-price risks stemming from a potential “no” response by the Greek referendum due 5^th July, intensifying demand for safe haven assets; yields on USTs and UK Gilts fell by 8 to 15bps overnight while a softer US pending home sales may have relatively weighed market optimism for a stronger housing market rebound. Similarly in the Eurozone, German Bund and OATs yields fell overnight; we expect core-peripheral spreads to continue widening amid higher volatility. ECB’s support for the EUR led to a currency rebound back above its 50 day MA of 1.11/USD (+2.35%), suggesting limited contagion risks should a “Grexit” materializes. This further affirms our views of improving fundamentals of the peripheral Eurozone members which have seen improvement in their current and fiscal balances. Meanwhile, ACGB yields fell as RBA continued to signal a rate cut to spur the country’s economic slowdown, further egged by global economic headwinds, including the slowing Chinese growth.   

¨    Over in Korea, KTBs pared previous day’s losses in response to the disappointing IP print in May (-2.8% vs 2.7% in April). We maintain neutral to mild overweight on KTBs where we expect risk aversion flows to benefit KTBs on top of the weak South Korean recovery which underscores the need for further rate cuts to complement the KRW15trn fiscal stimulus. Separately, the CGBs and CNY were little changed even as PBOC plans to inject CNY50bn into the banking system using the 7-day reverse repurchase agreements today to ease quarter-end tight liquidity.

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¨    MYR touched a fresh 10 year high of 3.78/USD, shy of the early pegged levels of 3.80/USD as investors continued to sideline ahead of the Fitch’s decision. We hold a short term bearish MYR view where trade surplus due Friday is expected to narrow further, compounding on weakened sentiment; longer term investors may add on dips towards our 1y forward target of 3.55-3.62/USD.