RHB FIC Rates & FX Market Update - 19/8/15

19 August 2015

Rates & FX Market Update

Global Bond Yields Broadly Higher Ahead of FOMC Minutes; RBA Minutes Relatively Neutral; BI on Hold, FY15 Debt Issuance on Target

Highlights

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¨    Strong housing starts buoyed optimism for a steady US recovery alongside optimistic Greek developments; DM govie yields broadly rallied; EUR fell lower towards 1.10/USD, with the strengthening USD in the driver seat of the pair. GBP also rallied yesterday after the strong inflation prints supported hawkish BoE expectations, but expect any tightening to lag the Fed; remain neutral to mildly bullish GBP. Meanwhile, RBA minutes were broadly neutral, citing the decline in commodity prices and AUD depreciation as supportive of Australia’s economic transition. The weaker AUD however resulted in an upward revision to its inflation expectations amid a stabilizing employment outlook but dampened speculations for further easing; Australia’s largest downside risk continues to stem from China; stay mildly bearish AUDUSD.

¨    In Indonesia, BI’s decision to hold rates at 7.5% kept the USDIDR below recent highs of 13917. Indonesia’s softening growth amid elevated global uncertainties underscores the need for further BI rate cuts but policy decision remains constrained by its high headline inflation; expect BI to remain on hold through 2015. On a positive note, BI shared that it has raised IDR360trn (80.4%) of its targeted 2015 gross issuance while highlighting plans to issue more bills given ample FX liquidity; we expect offshore investors to remain cautious in returning to the IndoGB market given high hedging cost and the vulnerability of the IDR. In Malaysia, USDMYR continued to flirt about its 4.12 resistance for the third day but subsequently retraced to 4.08; maintain mildly bearish MYR given its susceptibility to external risks amid declining reserves.

¨    USDKRW revisited a high of 1188 yesterday; the weaker currency may further dampen the allure of KRW assets amid narrowing interest rate differentials. Commodities and economically export dependent currencies are likely to remain vulnerable to further downside risk from China; USDKRW may retest 2010 high, underpinned by BoK’s dovish bias.