: RHB FIC Rates & FX Market Update - 7/9/15

7 September 2015

Rates & FX Market Update

September Lift Off Probability Unchanged At 30% On Mixed US Labour Data; G20 Finance Ministers Sanguine Towards Growth Outlook

Highlights

¨   While NFP data printed weaker than expected (173k; consensus: 217k), other labour data appear constructive; prior NFP data was revised upwards by 44k, while unemployment rate declined from 5.3% to 5.1%. Fed’s Lacker hawkish rhetoric supported a modestly flattening UST curve but saw little impact on USD as investors remain uncertain ahead of the FOMC meeting; stay mildly bullish on USD. Meanwhile, G20 finance ministers collectively play down fears over the slowing Chinese economy, with IMF continuing to dissuade the Fed from lifting rates amid the volatility; PBoC governor also assured investors that the end to the Chinese market rout is near, with the CNY stabilising following the devaluation in August. In EU, Germany’s factory orders fell 1.4% m-o-m (June: +1.8%) due to flagging foreign demand; the diverging outlook with US and the likelihood for ECB to increase PSPP should support our mildly bearish stance on EUR over the medium term.

¨   South Korea reduced the 2016 growth forecast lower from 3.5% to 3.3%, with the 2016 budget bill released this month likely to sustain its heavy hand on fiscal policies to fuel the tepid economy; maintain bearish on KRW over the near term. Malaysia’s July trade balance surprised on the downside (MYR2.4bn; June: MYR8.0bn) as imports surged 5.9% y-o-y (June: -1.5%) on stronger intermediates and capital goods, suggesting export resilency in the months ahead. Foreign reserves as of 28 August printed slightly higher (USD94.7bn vs USD94.5bn 2 weeks ago) as BNM remain on the sidelines for now; maintain bearish on MYR over the short term as the weak EM sentiment continues to weigh on the currency.

¨   AUDUSD breached its 6y lows with the pair falling below the 0.70 psychological level, attributed to bearish sentiment towards commodities and China. Markets are likely to price in additional rate cuts even as RBA remains wary due to the overextended housing market; AUDUSD downward correction to continue in the months ahead. We recommend staying mildly bearish on AUDUSD.