RHB FIC Rates & FX Market Update - 21/10/15

21 October 2015

Rates & FX Market Update

China Taken Another Step Towards RMB Internationalisation; Near-term Economic Concerns Remained a Dominant Sentiment Driver

Highlights

¨   UST yields climbed c.4bps overnight after stronger housing starts renewed optimism over the US economic recovery. We stay mild overweight USTs, as external risks should still draw cautiousness among some FOMC members. In UK, BoE’s McCafferty continued to call for a rate hike, arguing that the banks risks falling behind the curve as inflationary pressure picks up alongside strong labour and lending conditions. UK 50y GILTs sales via syndication drew record orders worth GBP21.9bn (BTC: 4.6x; 2.56%), dominated by domestic lifers and pension funds; stay mild overweight UK duration. Over in EU, Germany’s September PPI trended deeper into deflationary territory (-2.1% y-o-y; August: -1.7%) ahead of ECB’s decision due Thursday. Weak headline inflation and expectations should continue to put pressure on ECB to reverse the trend; stay mildly bearish EUR. Japan unexpectedly posted a trade deficit (-JPY114.5bn; Consensus: +JPY87bn), as export growth disappointed (0.6% y-o-y; August: 3.1%); we stay mildly bullish on JPY, supported by strong safe haven demand.

¨   China’s PBoC also sold its first yuan-denominated bonds in London, advancing its ambitions to internationalise the Yuan; the CNH5bn 1y bond sale was more than 6 times oversubscribed, with final yield of 3.1% c.20bps below the initial guidance of 3.3%. We view the strong investors’ interest as positive, but the impact on CNY/CNH is likely to be limited over the near term as China’s economic slowdown continues to rattle investors; stay mildly bearish on further rate cut prospects. Indonesia’s trade minister hinted possible downward revisions to their plan to triple Indonesia’s exports in 5 years which was perceived to be unrealistic, but vowed to slash further regulations to facilitate trade flows and investments; reforms are a long-term positive, but we remain cautious on IDR over the near term on current economic gyrations.

¨   USDINR climbed c.0.4% overnight on generally poor risk sentiment, but was relatively muted compared to the IDR, which declined more than 1% against the USD. Despite being a high-yielding currency, INR remained resilient amid the current bout of volatility; we continue to stay constructive on the currency relative to regional peers, as low oil prices should support external accounts and restrain price pressures.