: RHB FIC Rates & FX Market Update - 12/8/15

12 August 2015

Rates & FX Market Update

Risk Sentiment Hurt by PBoC’s Unexpected Devaluation; Asian FX Vulnerable to Further Risk Aversive and Volatile Shifts

Highlights

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¨    PBoC surprised the market yesterday by raising the CNY fix significantly by 1.86% to 6.2298/USD, resulting in higher Asian FX volatility yesterday. We view the shift strategic to combat a confluence of factors including: (i) CNY’s strong overvaluation (REER terms: >20%); (ii) weak exports and trade activity; and (iii) domestic weakness. While the official PBoC release has cited the devaluation move as a one-off incident, we expect a period of heightened volatility and risk aversion as investors face a second consecutive day of higher fixing (+1.62%); trading boundary today between 6.3040 – 6.4572/USD.

¨    The risk-off sentiment supported DM sovereign bonds which rallied across the curve, driven by longer-end bonds over global growth and inflation concerns as commodities took another leg lower. Both 10y and 30y USTs broke the 200DMA (2.141%, 2.816% respectively), while demand for 3y new issuance surged above the YTD average, shrugging off the better wholesale inventories data; maintain neutral to mild overweight on USTs. In Europe, EC reported better ZEW survey sentiments (47.6, July: 42.7), while reports that Greece struck a broad deal with creditors ahead of the August 20 deadline continued to support EURUSD above 1.10. We prefer to remain prudently cautious as final negotiations continue; stay mildly bearish on EUR. Turning to Japan, PPI contracted 3% y-o-y in July, as declining energy prices continued to dampen its inflation outlook; BoJ’s July minutes revealed that at least 2 members turned increasingly bearish on the Japanese inflation outlook; expect QQE to be maintained and remain neutral to mild bearish USDJPY.

¨    AUDUSD gave back gains bolstered by the hawkish RBA statement last week, depreciating towards a key support of 0.73/USD. AUD remains tilted to the downside, implicated by (i) the unexpected CNY devaluation; (ii) weak commodities market; (iii) policy and economic outlook divergence on top of (iv) lower AUD yields which would further dull the allure of AUD demand; stay mildly bearish AUD.