RHB FIC Rates & FX Market Update - 29/10/15

29 October 2015

Rates & FX Market Update

FOMC Downplayed Reference to Global Economic Developments While Keeping Options Open for a December Lift Off

Highlights

¨   Global Markets: Yields on 2y and 10y USTs jumped higher to 0.70% (+8bps) and 2.10% (+6bps) overnight as investors reacted to the more hawkish-than-expected FOMC statement. Notably, the statement downplayed its reference to the global economic uncertainty, bringing market’s focus back to solid improvements in the domestic economy and specifically citing its deliberation for a rate hike in the December meeting, which boosted strong gains on the USD (DXY: +0.90%). While FFR futures implied probability for December rate hike rose to 48.2% (pre-FOMC: 34.7%), we do not discount the likelihood for Fed to err on the conservative side and defer its rate hike plans to 2016. Meanwhile, EGBs rallied overnight buoyed by top ECB officials’ affirmative comments supporting further ECB easing in December; an expansion in PSPP is likely to remain constructive for peripheral EGBs while deepening the diverging monetary policies between EU and US, keeping EUR subdued below 1.10/USD.

¨   Asian Markets: Japan’s IP recorded a modest decline of -0.9% in September (consensus: -2.6%; August: -0.4%), easing earlier fears of a deeper downward spiral in manufacturing growth. Ahead of BoJ meeting tomorrow, we remain biased for BoJ to expand QQE, but opine for any knee jerk selling in JPY to be unsustainable; keep a neutral stance on JPY over the near term, where we see a strong resistance at 122.5/USD over the near term. Over in Thailand, demand for the THB13bn 15y ThaiGB was softer, with BTC at 1.66x amid lower cutoff yields of 2.84% (September: 2.76x; 3.11%) and higher auctioned amount. While BoT is likely to maintain its dovish inclination, we reiterate our preference for shorter dated ThaiGBs given lingering supply risks over FY16.

¨   AUD declined by 1.36% against the strengthening USD to 0.710. Reviving signals for investors to reassess RBA rate cut emerged with the softer CPI data in spite of the secular AUD depreciation in the past year, which could keep the window of opportunity open for RBA to cut rates and support the weak economic rebalancing in Australia. Remain cautious on AUD, which is likely to retest its 0.70 support ahead of RBA meeting.