RHB FIC Rates & FX Market Weekly - 19/10/15

19 October 2015

Rates & FX Market Weekly

US Data to Offer Fresh Insights Amid the Divided Fedspeak; ECB to Contemplate Expanding PSPP

Highlights

¨   Global Markets: Risk aversion broadly declined as markets continue to lose conviction over Fed’s ability to lift rates this year, with the first hike now expected in April 2016; FOMC members appear increasingly divisive over the timing of rate normalisation. Fedspeak (Dudley and Powell) in the week ahead remains relevant given shifting sentiment, while housing and flash manufacturing PMI data will be scrutinised for any signs of US macro weakness. Mild overweight UST should deliver positive outperformance over the medium term as investors remain doubtful of the state of the global economy. In EU, ECB reconvenes on 22 October to debate further expansion in the PSPP amid weak inflation and activity indicators; we look for hints suggesting further easing in the months ahead, but do not rule out a move this meeting to boost asset purchases. Flash PMI due in the week ahead is expected to show slight moderation in the pace of economic expansion, while Greece-related news could weigh on peripheral EGBs if the parliament fails to approve agreed reform measures; stay mildly bearish EUR. UK’s retail sales data should attract sizeable attention, where a strong print should provide some relief to the BoE; remain mildly bullish on GBP. In Australia, minutes from RBA should shed further insights into the rate decision, particularly the views relating to the global economy in September; remain mildly bearish on AUD on further terms of trade deterioration. Over in Japan, investors remain hopeful for BoJ to contemplate further easing options given the tepid pace of recovery and modest uptick in core CPI; remain watchful of USDJPY pair, which continues to consolidate within its 118-121 range.

¨   AxJ Markets: The 3Q Chinese GDP print is unlikely to bolster any optimism within the region, with consensus expecting it to be 6.8%, below the official Chinese target of 7.0% growth for the year; other Chinese economic data prints are likely to take a step back as we edge closer the 5^th Plenary Session, with intense discussions on growth outlook are likely to set market’s trading tone given its impact on the region and likelihood for PBoC easing to achieve the target. Over in South Korea, the 3Q GDP print is likely to reaffirm the moderating pace in GDP, keeping BoK’s dovish tilt and supporting short KTB tenors. Elsewhere, keen attention on Singapore economic data is likely to fade following MAS decision to ease the SGD NEER slope modestly. A negative CPI print is likely to have marginal impact on USDSGD, as investors turn their attention back to US and the FFR trajectory; the short term strength on SGD may provide further reprieve for short SGS tenors, maintain neutral duration. In Malaysia, expect some focus on foreign reserve numbers, although it is unlikely to decline significantly as capital outflows reversed following improvements in risk appetite. The key to watch is the 2016 budget, where the Malaysian government will attempt to balance fiscal stimulus to revive growth while limiting the deficit to meet long-term budget goals. We stay neutral on MGS, cautious of lingering risk aversion, although yields remain elevated relative to fundamentals. Over in Thailand, interest in ThaiGBs may be dampened by the supply risk as Thai government seeks to auction THB33bn of 5y (THB24bn) and 30y (THB9bn) ThaiGBs. Little key data coming from Indonesia and India, expect external gyrations to dominate price movements; maintain our preference for India over Indonesia on lower volatility and improving fundamentals.    

    

Selected Trade Reviews:

¨   Trade Idea: Long 2y KTB vs 2y UST (Entry (28 Sep): 91bps; Current: 100bps; Stop Loss: 110bps; Target: 75bps)

Diverging growth and monetary policy outlook to drive the spreads between the pair tighter.

¨   Trade Idea: Long 3y CGB (Entry (3 Jul): 2.820%; Current: 2.770%; Stop Loss: 3.200%; Target: 2.400%)

Softening Chinese growth to fuel expectations for further PBoC easing, bolstering gains on short dated CGBs.

¨   Trade Idea: Long GBPSGD (Entry (23 Sep & 6 Oct): 2.1632; Current: 2.1367; Stop Loss: 2.0849; Target: 2.3000)

Further easing expectations may weigh on SGD strength amid lingering external weakness; BoE tightening expectations overshadowed by dismal negative CPI print.

Weekly Positioning

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