RHB FIC Rates & FX Market Update - 5/6/15

5 June 2015

Rates & FX Market Update

DM Govies Took a Breather from Initial Rout; PBoC Takes Another Step in Capital Account Liberalization

Highlights

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¨    Volatile movements were seen for USTs, with 10y yields touching an intraday high of 2.42% before retracing lower to 2.31%, taking respite from the DM govie sell-offs earlier this week. In addition, IMF’s calls to delay the Fed’s FFR hike to 2016 will likely continue building the case for a data-dependent Fed to defer hike to beyond June. Turning to EU, the rapid rise in EGB yields took a breather, with 10y yields declining 2-4bps across the region as investors turned to safer assets following Greece’s decision to delay IMF repayments by bundling the month’s repayments to 30 June. Elsewhere, Gilts gained as BoE’s decision to maintain status quo yesterday affirmed expectations for the central bank to hold off any rate hike at least until 2016.

¨    PBoC takes another affirmative step towards capital account liberalization, announcing the introduction of China’s repo market to offshore players which is likely to narrow the gap between onshore and offshore rates while expectations intensify for PBoC to remove the current 1.5x deposit rate ceiling in the near term; gains in CGBs were skewed towards the short end of the curve. Meanwhile, Thai consumer confidence slipped to an 11-month low, suggesting that tepid economic recovery continued to weigh on sentiment and domestic consumption. Yields on ThaiGBs continued their upward climb, rising 1-14bps overnight following subsiding pressure from the Thai government on BoT to cut rates; maintain mild overweight on ThaiGBs, as the slow recovery and political uncertainty is likely to compel BoT to maintain its dovish stance.

¨    Weak sentiment on MYR weighed by 1MDB and Fitch’s review drove the SGDMYR to its high of 2.75. Our SGDMYR position was stopped out, with a geometric return of -1.86%, cushioned by the higher carry on the MYR. We opine any impact arising from a potential Fitch downgrade has been largely priced in and may look to re-enter the position in the near term.