RHB FIC Rates & FX Market Update - 1/7/15

1 July 2015

Rates & FX Market Update

Greece Missed IMF Deadline; Fitch Downgraded Greece to CC but Lifted Malaysia’s Sovereign Outlook to Stable, A- Rating Unchanged

Highlights

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¨    Contrary to broad expectations, including ours, Fitch maintained Malaysia’s sovereign rating at A- (stable), premised on the improving fiscal finances following the implementation of GST and fuel subsidy reforms. Fitch highlighted that Malaysia’s GDP and current account trajectory remain above “A”-rated medians. Prior to the release, MGS 5y, 7y and 10y benchmarks gained, suggesting continued pricing in of the odds of a negative revision. We welcome the positive surprise where the domestic market has kicked off on a stronger footing this morning; the MYR has rallied 0.86% to 3.741/USD by the mid-morning. The optimism may overshadow the narrower trade surplus due Friday, but we maintain for long term investors may add on dips towards our 1y forward target of 3.55-3.62/USD. Meanwhile, THB remained resilient at 33.798 while KRW strengthen to 1115.5 as Thailand and South Korea recorded higher trade surpluses in May.

¨    Peripheral EGBs outperformed Core govies even as Greece missed its EUR1.6bn IMF deadline following a breakdown in negotiations post referendum announcement. Fitch downgraded Greece’s ratings to CCC from CC, while S&P downgraded 4 Key Greek banks to selective default (SD) following capital controls introduced on Monday. In the UK, GILTs recorded broad gains despite better 1Q15 final GDP estimates (2.9% y-o-y vs 2.4% prior). In Japan, the modestly stronger Tankan prints does not discount the need for further easing to support a firm recovery; ongoing safe haven demand kept JPY supported at 122.5/USD.

¨    EURUSD slid below its 50day MA (1.117) but remained supported above its 100day MA (1.114) despite better selling against USD and JPY. The EUR resilience suggests limited contagion risks if a “Grexit” materializes, affirming external and fiscal balances improvements among Peripheral countries. Nonetheless, we maintain a longer term m.bearish EUR vs a modestly appreciation USD base case.