: RHB FIC Rates & FX Market Update - 2/9/15

2 September 2015

Rates & FX Market Update

Broad Risk Aversion Following Lacklustre Global PMIs, Including China’s Persistent Decline; RBA Unchanged, AUD Tested 0.70/USD

Highlights

¨   The persistent deterioration in China manufacturing PMI to its 3y low alongside notably softer services PMI expansion (Aug: 51.5; Jul: 53.8) rekindled risk off sentiment and fueled gains in USTs, with yields declining 3-7bps and DXY down 0.39% overnight. US ISM manufacturing print also underwhelmed expectations, but investors focal points remains pinned on the upcoming NFP data, Fed Beige book and Fedspeaks for clues to Fed’s potential decision amid global growth concerns; maintain mildly bullish USD but expect bouts of volatility spikes ahead of the next FOMC meeting on September.

¨   In EU, risk aversion supported the outperformance of core EGBs versus peripherals, further bolstered by an improving PMI print from Germany in contrast to most other EU economies; EUR edged higher towards 1.13/USD, maintain tactically neutral EUR amid global uncertainty. RBA held rates at 2% yesterday, maintaining an accommodative stance, but see incrementally lower inclination towards further RBA rate cuts amid the protracted weakness in AUD; AUD tested the 0.70/USD psychological level.

¨   AxJ PMI prints also indicated further contractions in the manufacturing sectors, prompting a likely reduction in IMF’s growth forecasts in its semiannual outlook publication scheduled in October as hinted by Lagarde. The decline in Thai CPI (Aug: -1.2% vs Jul: -1.0%) remains supportive of further BoT easing expectations; maintain mildly bearish on THB. Indonesia’s CPI surprised on the downside (7.18% y-o-y; July: 7.26%), but BI’s room for easing remains constrained on the IDR’s decline; maintain mild underweight IndoGBs.

¨   USDCNH fell 0.38% yesterday to 6.4175 following PBoC’s new regulation requiring banks to hold 20% of the CNH forwards reserves in interest-free USD accounts, starting October 15. The new rule aims to manage CNH volatility by discouraging excessive speculation given higher costs. We maintain our mildly bearish outlook on CNH, with expectations for further PBoC easing measures to weigh on the currency.