RHB FIC Rates & FX Market Update - 4/6/15

4 June 2015

Rates & FX Market Update

Draghi Comments Stoke Bond Rout; Indian Services PMI Contracted First Time Since April 2014

Highlights

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¨    Last night’s ECB meeting saw no change to interest rates but Draghi’s comments of the lack of need to accelerate bond purchases negated any positive sentiment stoked by Coeure’s earlier suggestions. Additionally, Draghi warned of volatility in the markets but was positive on inflation picking up in the region. Bund curve extended its steepening momentum with the 10y yield adding 17bps overnight and trading just below 0.9%; expect the tepid sentiment to dampen demand for upcoming OAT auctions. Elsewhere, the US Fed Beige book indicated that the strong USD had a negative impact on some manufacturers in various regions of the economy while most districts were experiencing either moderate or modest growth. As such, this is likely to raise further concerns of a slowing recovery in the US economy, pushing back Fed rate hike expectations ahead of the June FOMC meeting.  Aside, AUDUSD extended its appreciation streak while ACGBs bear steepened, following better than expected 1Q GDP prints. Nevertheless, we remain cognizant on the relative overvaluation of the AUD alongside elevated unemployment levels and are likely to see the RBA maintaining its accommodative stance.

¨    In Asia, the upbeat services PMI is likely to offset negative sentiment from a moderating manufacturing sector but is unlikely to provide further insights to investors; CGBs and the USDCNY traded sideways. Notably, services in India contracted for the first time in 13-months but are unlikely to see any significant impact on GoISecs and the INR.   

¨    The EURUSD traded closer towards the near-term resistance of 1.1293 overnight, following Draghi’s comments, while upbeat economic data supported suggestions of inflation optimism, supporting EUR strength. 50/100 day MA continues to converge, indicating further bullish strength, but we remain mildly bearish on the EUR given its fragile economy amid Greek debt talks.