RHB FIC Rates & FX Market Update - 24/7/15

24 July 2015

Rates & FX Market Update

Weaker Oil Prices Supported Gains on Long Dated USTs; Malaysian Foreign Reserves Fell to 5y Low

Highlights

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¨    The UST curve bull flattened on the back of a bullish initial jobless claims print which declined to a 4-decade low, bolstering Fed rate hike chatters and further cementing economic optimism amid a subdued inflation outlook as commodity prices continued easing. Over in EU, the Greek Parliament has approved the second series of reforms demanded by EU creditors in order to secure the second bailout package, supporting firmer gains in both the core and peripheral EGBs. EUR climbed higher to 1.098/USD on the back of softer USD performance, providing investors with opportunities to add EUR shorts premised on further downside risk from Greek restructuring alongside CPI and growth concerns. Elsewhere, IMF remains unconvinced of Japan’s efforts in fiscal consolidation, urging for further curbs on spending; Japan’s exports accelerated in June, aided by the weaker JPY and strong demand from US where we expect the strengthening external balances to support the lackluster economic recovery.

¨    Singapore’s CPI picked up in June (0.3% vs May’s -0.4%) but still within the lower half of MAS’ forecasted range. We anticipate IP data this afternoon, where another negative y-o-y IP print may see continued softness on the SGD but at this juncture, we prefer to maintain a no change expectation at October’s meeting. Meanwhile, the decline in Malaysia’s foreign reserves persisted to a 5y low of USD100.5bn as at July 15 (7.9 months of retained imports; 1.1x short term debt), suggesting the likelihood of prudent FX intervention to manage the volatility on MYR in the FX market; USDMYR remained sticky near its 3.800 psychological level.

¨    Softer than expected retail sales print in UK stymied the appreciating momentum of GBP, driving it lower to 1.551/USD overnight as the softer print suggests that growth momentum in UK may have yet to firm up. We have revised our stance on GBP to tactical bullish, where we see the brief reprieve in the GBPUSD pair to offer opportunities to add GBP longs, with a target of 1.580/USD. 

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