RHB FIC Rates & FX Market Update - 3/6/15

3 June 2015

Rates & FX Market Update

Safe Haven EGBs Fell on Greek Optimism; RBI Cut Rates amid Subdued CPI; PBoC’s Long Term PSL to Support a Flatter Curve

Highlights

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¨    Core EGBs underperformed as widespread optimism surrounding positive developments over Greek debt talks spurred risk-on sentiment; EURUSD soared above its 1.10 resistance. As such, expect today’s ECB meeting to focus on Greek talks alongside the pace of QE in the summer period, which could lend support to the weak EGBs. Turning to the US, yields on USTs continued climbing as expectations of strong data to be released today is likely to continue supporting the belief of a slightly hawkish Fed in June’s meeting while rising yields in the EU dulled relative attractiveness of USTs.

¨    Yields on GolSecs climbed even as RBI reduced the repurchase and reverse repo rates by 25bps to 7.25% and 6.25% respectively. RBI added that India’s monetary policy outlook hinges on the impact of monsoon rain on the CPI while it continues to assess the impact of the rate cut. Meanwhile, the steeper CGB curve seen in May remains on PBoC’s watch list, with speculation of medium-to-long term liquidity injections via the Pledged Supplementary Lending (PSL) program to support the overall financing costs in China; expect the modest bull flattening trend to continue as PBoC withdraws part of its short-term liquidity in PSL.

¨    Elsewhere, Thai’s CPI delved deeper into the negative territory, reinforcing views of another BoT rate cut, as the Thai budget bureau struggles to accelerate infrastructural spending amid project delays; USDTHB remained below its 33.8 resistance. Separately, MYR was pressured higher to 3.69/USD amid worries of Fitch’s downgrade and better US data; we believe its downside risks may have been largely priced in. 

¨    Although RBA held rates at 2% while reiterating the necessity for a weaker AUD, little indication was seen for further RBA easing, resulting in profit taking on AUD shorts, driving the pair higher by 2.12%. Delays in FFR liftoff and RBA’s dilemma between growth and property bubbles remain key risks to our call, where we revised our target level higher to 0.7530.

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