24 July 2015
Rates & FX Market Weekly
FOMC Meeting to Underscore Sentiment
Heading into August; Weak Chinese PMI Highlights Sluggish Start to 3Q15
Highlights
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¨ Global
Markets: With Fed being the pacesetter, July’s FOMC due in the coming week
should remain extremely relevant to investors despite the lack of press
conference or detailed projection this meeting. Markets appear divided over
Fed’s rate hike trajectory following the broad pickup in economic data
including a 40-year low jobless claim data. Investors will also face USD90bn of
USTs next week, where the 2y and 5y notes could be treated as unscheduled
reopening or the 07/17 and 07/20 if cut-off yields fall within ranges of
0.500-0.624% and 2.000 – 2.124% respectively. US and UK to share optimistic
2Q15 growth numbers (US 2Q: 2.5% q-o-q; 1Q: -0.2% and UK 2Q BoE(f): 0.7%; 1Q:
0.4%), likely to bolster further rate hike chatters. At present, we
opine that a BoE rate hike has not been fully priced in and likely to lag
investors pricing in a Fed rate hike. Following S&P rating upgrade
to CCC+, Greece approved a 2nd reform package demanded by creditors, paving the
way for formal bailout negotiations before the next ECB repayment on August 20.
EURUSD is higher on the week, yet we think reconciling their differences
remain difficult; expect EURUSD to remain volatile with downside risks.
Over in Japan, optimism from strong exports is unlikely to sustain
strengthening JPY momentum next week; June’s CPI marginally above 0% could evoke
additional concerns of BoJ missing its 2% GDP target in FY16 and fuel
speculations of additional measures from BoJ this year. 2y JGB new issue
should be well received given its relatively attractive valuations compared
to belly rates. After RBA minutes this week reiterated the board's preference
for a weaker currency, the focus next week will be on macro data where
consensus point towards further weakness amid softer commodity prices which has
weighed on the AUD. We remain mildly bearish on AUDUSD due to RBA’s clear
preference for a weaker AUD and the need for further external adjustments.
¨ Quieter
Asian data week; expect macro developments this week to continue headlining
sentiment in week ahead on top of month-end rebalancing flows and external
developments. Demand for the 20y KTB auction expected to be weaker than
average, dampened by the higher net supply and weak KRW. The PMI weakness
from China highlights a weak start to 3Q growth; CGBs to remain firm,
supported by lingering expectations of further PBoC easing measures.
Meanwhile, Thailand’s exports print is unlikely to surprise on the upside; expect
further downward pressures on the THB over the near term. We opine that the
elevated expectations for an export recovery to support the sluggish Thai
economy is unlikely to materialize over the near term, compelling BoT for
further easing measures. In Malaysia, MGSs seen better buying post Raya
with 10y yields tightening below 4%; we expect MGS to stay relatively stable
and USDMYR supported around the 3.8000 level next week, but remain
watchful of month-end flows and Fed's decision.
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Selected Trade Reviews:
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Trade Idea: 5/10y ACGb
Flattener (Current: 71bps; Entry: 79bps; Stop Loss: 95bps; Target: 55bps)
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5/10y ACGB to flatten in tandem with USTs.
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Trade Idea: Tactical Long GBPUSD (Entry:
1.4960; Current: Stop Loss: 8.6000; Target: 9.4000)
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GBP to benefit from building momentum for a
bank rate hike.
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Trade Idea: Long USDKRW (Entry: 1083.5;
Current: 1164.8; Stop Loss: 1010.0; Target: 1180.0)
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Target to take profit on
USDKRW at 1080/USD.
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Weekly Positioning
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Rates
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FX
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Overweight
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Mild Overweight
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UST, GILT,
P.EGB, CGB, MGS, ThaiGB, GolSec
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USD, GBP
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Neutral
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C.EGB, ACGB, SGS, IndoGB
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SGD, HKD, CNY, INR
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Mild Underweight
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KTB
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EUR, AUD, JPY, MYR, THB, IDR
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Underweight
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JGB, HKGB
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KRW
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