RHB FIC Rates & FX Market Weekly - 15/6/15

15 June 2015

Rates & FX Market Weekly

Fed Meeting To Headline Sentiment; BoK to Remain Accommodative on MERS Outbreak Concerns

Highlights

¨                   

¨    Global Markets:  FOMC statement due Wednesday could offer hints of Fed’s first hike but remain supportive of the USD. The committee is likely to maintain the FFR in June where we believe the early signs of upbeat economic prints remains insufficient to conclude a firm economic rebound and unlikely to provide a convincing support for Fed to kick start tightening. Over in the UK, BoE minutes will shed some light on whether the committee unanimously agreed to a status quo policy decision; the central bank is expected to hold a dovish tilt given subdued inflation expectations. In the Eurozone, inflation is expected to flat-line in May, while uncertainty surrounding the Greek impasse will again cloud market sentiment. Separately, RBA meeting minutes could echo Glenn Stevens' earlier concerns on inflated housing market, leaving rate cuts on hold while staying accommodative for a prolonged period, supportive of short AUD positions. That aside, we expect low real yields among ACGB to dull the allure of the upcoming 10y offering despite nominal yields breaking above 3.0% last week. Turning to Japan, we opine for JPY's movements to remain range bound between 122-125/USD, supported by Kuroda's comments and expectations for BoJ to maintain its QQE framework; lackluster IP and trade data are unlikely to sway market sentiment towards further easing next week. Meanwhile, the 40y JGB auction may garner a softer than average demand, following BoJ's plans increase longer duration issuances for this year amid subdued yields. 

¨    AxJ Markets: We expect the increasing Chinese municipal bond issuances to continue dampening demand for the CGBs over the near term, including the 7y auction ahead, as domestic investors enjoy concessionary privileges for municipal bonds over the government bonds. Over the medium term, opening of capital markets to foreign investors is likely to be able to absorb the additional supply in the Chinese market. Turning to Korea, the MERS outbreak continues to weigh on sentiment where we expect strong support for the new 10y benchmark KTB auction; expectations for the prolonged BoK policy accommodation is likely to continue weighing on the performance of KRW over the near to medium term. Elsewhere, Hong Kong goes to poll next week to vote on the Chief Executive electoral reform, with surveys suggesting a tight race; maintain underweight on HKGBs amid unattractive real yields. Meanwhile, lackluster NODX prints in Singapore are likely to remain a non-mover in the market as the SGD remain range bound between 1.34-1.36/USD. Malaysia’s inflation is expected to pick-up in May, while we expect little response from the market on the impending release. In Indonesia, we expect BI to hold rates entering into Ramadhan period, on renewed inflationary pressures along with a weakening IDR. Else, the weaker IDR should support exports lending support to a wider trade surplus. Lastly, we anticipate WPI prints in India where we expect the print to remain in negative territory and expect at least another 25-50bps rate cut by RBI for this year; USDINR should hover around the 64 level, taking cues from FOMC development.

¨             

¨             

¨             

¨             

¨            Selected Trade Reviews:

¨      Trade Idea: Long 10y KTB vs 10y UST (Current: 11bps; Entry: 54bps; Stop Loss: 100bps; Target: 10bps)

¨            BoK’s dovish mode given the surprise 25bps interest rate cut is expected to anchor short end rates

¨      Trade Idea: 3/10y KTB (off-Benchmark) Steepener (Current: 67bps; Entry: 44bps; Stop Loss: 10bps; Target: 90bps)

¨            MERS outbreak compounded on its already sluggish recovery

¨      Trade Idea: Short JPYTHB (Current: 27.140; Entry: 27.860; Stop Loss: 28.600; Target: 26.800)

¨            Fundamental weakness in the Japanese economy remains

¨             

¨            Weekly Positioning

¨             

¨	¨                  Rates	¨                  FX
¨                  Overweight	¨	¨
¨                  Mild Overweight	¨                  P. EGB, ACGB, KTB, CGB, MGS, ThaiGB,  GolSec	¨                  USD
¨                  Neutral	¨                  UST, GILT, C.EGB, IndoGB	¨                  GBP, HKD, MYR, INR
¨                  Mild Underweight	¨                  RPGB, SGS	¨                  EUR, AUD, JPY, SGD, CNY, PHP, THB, IDR
¨                  Underweight	¨                  JGB, HKGB	¨                  KRW