RHB FIC Rates & FX Market Weekly - 17/8/15

17 August 2015

Rates & FX Market Weekly

Chinese Headwinds Unlikely To Materially Influence Fed’s Decision; Indonesia 2016 Budget Realistic but Weaker than Initial Assumptions

Highlights

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¨    Global Markets: July’s FOMC minutes are unlikely to surface any new information but investors to eye clues on Fed’s rate hike trajectory. While the recent spike in market uncertainty could keep USTs well supported, the Chinese headwind is unlikely to trigger a major shift in Fed’s consideration given US seemingly firmer recovery, supported by the firm US IP and manufacturing prints. Eurozone finance ministers to mull over Greece’s latest proposals ahead of ECB’s repayment on 20 August will is likely to face resistance towards a third Greek bailout. Lackluster EU GDP to overshadow the stable CPI print which may have bottomed in line with ECB’s expectations, maintain neutral to mild overweight core EGB. In Australia, RBA minutes remains crucial following the stark change in RBA’s view on the economy despite adopting a fairly neutral policy tone; stay mildly bearish AUD. Over in UK, the subdued CPI print may continue to affirm investors’ expectations for BoE to lag Fed. Japan’s GDP is expected to signal contraction given the weakening exports print alongside tepid private consumption. That aside, overall trade balance and preliminary manufacturing PMI prints are expected to improve but a persistent trade shortfall could further deepen the country’s BoP deficit and erode its current account further.

¨    AxJ Markets: Bank Indonesia is expected to stand pat on 18 August where the central bank continues to face constraints from the high headline inflation and depreciating IDR. We eye slight improvements in the trade balance, driven by import compression against a softer IDR outlook. Indonesia’s proposed 2016 budget with an IDR assumption of 13,400, 2.1% fiscal deficit and 5.5% GDP appears relatively optimistic and realistically weaker than previous assumptions, but we expect any reprieve to be short term given high external risks.  Malaysia’s July CPI is expected to trend higher as the impact of the GST implementation begins to trickle in; external volatility and uncertain domestic developments suggest staying mildly bearish on MYR. Singapore’s NODX due in the week ahead to remain weak amid higher global uncertainty where Greater China is Singapore’s largest export partner. Turning to Thailand, its 2Q15 GDP is likely a non-market mover amid steady expectations but the 2020 re-opening (5y, coupon: 2.55%, YTM: 2.15/2.10%) appears relatively unattractive given its lackluster carry and mild overvaluation; do not view this re-opening to be attractive for offshore investors given that MGS and RPGBs both offers a better pick-up at this tenor.    

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¨            Selected Trade Reviews:

¨    Trade Idea: Long USDSGD (Current: 1.4041; Entry: 1.3567; Stop Loss: 1.3100; Initial Target: 1.4100; Revised Target: 1.4200)

¨            SGD to remain a victim of lower Asian conviction and likelihood of MAS easing.

¨    Trade Idea: Long USDKRW (Entry (21 Apr): 1083.5; Closed (12 Aug): 1182.1; Geometric Return: 8.67%)

¨            USD appreciation, moderating Chinese growth and surprise CNY devaluation benefitted USDKRW.

¨    Trade Idea: Long IndoGB 11 11/20 (Entry (26 June): 8.126%; Closed (13 Aug): 8.527%; Geometric Return: -0.6%)

¨            Heightened volatility and increase in risk aversion impacted IndoGBs negatively

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¨            Weekly Positioning

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¨	¨                  Rates	¨                  FX
¨                  Overweight	¨	¨
¨                  Mild Overweight	¨                  UST, P.EGB, CGB, MGS, ThaiGB, GolSec	¨                  USD, GBP
¨                  Neutral	¨                  C.EGB, ACGB, SGS, GILT, IndoGB	¨                  SGD, HKD, INR
¨                  Mild Underweight	¨                  KTB	¨                  EUR, AUD, JPY, MYR, THB, IDR, KRW, CNY
¨                  Underweight	¨                  JGB, HKGB	¨