7 July 2015
Rates & FX Market Update
Negative Developments in EU as Greece
Extended Capital Controls; RBA May Hold Back Rate Cuts on Depreciating AUD
Highlights
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¨ USTs bull flattened in overnight trading with markets
remaining on the edge as Greek woes persisted with the government extending
capital control through Wednesday and ahead of tonight’s Eurogroup meeting.
The continued curve flattening was also supported by poor manufacturing and
services data in the US, pushing back rate hike expectations.
Core-peripheral EGB spreads continued to widen, with gains on Bunds persisting
for a second day spurred by safe haven flows; mounting uncertainty
surrounding Greek debt resolution should continue to support a modest widening
of EGB spreads, with Greece Finance Minister Varoufakis turning in his
resignation just as EU offers Greece a 24h deadline to submit a new proposal.
¨ Despite
tepid economic recovery and soft commodity prices, the recent downward
pressures on AUD held firmly below 0.75/USD could allow RBA to hold back on
further rate cuts in its meeting later today; yields on ACGBs tumbled by
8-14bps overnight, as rising risk aversion from China and Greece supported
gains on the safer assets in Australia. Meanwhile, the South Korean
Parliament is expected to approve the KRW15trn (USD13bn or 1% of GDP) budget
tomorrow, where the bulk of the fiscal stimulus tailored to mitigate the
impact of MERS on the domestic economy will be funded through bond issuances
(KRW9.6trn additional KTB issuances), raising concerns on a steepening KTB
curve amid higher bond supply as the short dated KTBs remained anchored by
expectations for further accommodative measures by BoK; KRW depreciated to
1126/USD.
¨
MYR broke its psychological level to 3.8092/USD
yesterday, driven by rising political noise, renewed decline in oil prices
and rising risk aversion stemming from Greek debt woes. Persistently soft
crude oil prices (Brent at USD57 last night) are likely to continue weighing on
MYR where we have turned short term bearish MYR, with a revised forecast of
3.83/USD by YE15.
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