RHB FIC Rates & FX Market Update - 8/7/15

8 July 2015

Rates & FX Market Update

3y UST Auction Aided by Lower Oil Prices; Sunday Eurogroup Meeting Eyed as Greek Negotiations Faltered; New BoT Governor Appointed

Highlights

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¨    Uncertainty stemming from the Greek crisis continued to support appetite for USTs, in addition to IMF’s repeated advice for the Fed to hold off FFR hike to 2016 ahead of the FOMC minutes release later today. The gloomy sentiment spurred strong demand at the 3y UST auction, garnering a BTC of 3.17x despite lower yields of 0.932% (June: 3.35x; 1.125%); UST yields declined further by 1-4bps. Similar trend was also apparent across Gilts, with the 30y auction BTC at its 8-month high of 1.89x at 2.73%. This aside, core-peripheral spreads tightened on lower oil prices, suggesting a period of prolonged accommodative policies on subdued inflation but volatility is expected to persist heading into the weekend as Greek negotiations broke down yet again; EU leaders offered Greece a deadline on Sunday to submit another reform proposal, which appears to be an ultimatum for remaining in the EU.

¨    In line with expectations, RBA kept its Cash Rate unchanged at 2%, while reiterating that a further decline in AUD remains necessary given weak commodity prices; AUDUSD was pressured lower to 0.7445. Meanwhile, the Thai Cabinet has named Veerathai Santiprabhob as the new BoT governor, a former IMF economist and a member of Prayuth’s “super board”, succeeding the retiring Prasarn Trairatvorakul in September; THB fell by 0.39% against the strengthening USD. Elsewhere, concerns on the stark decline in Shanghai stock market would worsen the slowing economic growth, prompting the Chinese government to expand fiscal spending in 2H15; maintain mild overweight on CGBs. 

¨    GBPUSD broke its 1.553 support, falling by 0.96% ahead of Chancellor Osborne’s budget speech.  Expectations are tilted towards further spending cuts and a new balanced budget rule that would allow the government to borrow only in exceptional circumstances. Our YE15 target for GBP remains at 1.52, where spending restraint may pose headwinds to UK government’s growth target.

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