RHB FIC Rates & FX Market Update - 5/11/15

5 November 2015

Rates & FX Market Update

Yellen & Dudley Hints for December Liftoff Support the Strengthening USD

Highlights

¨   Global Markets: The encouraging ADP employment and stronger ISM data fueled the exhuberant movement on DXY overnight (+0.73%). Similarly, UST yields continued their upward climb, with yields on 2y notably rising to its April 2011 high above 0.80% as Fed’s Yellen and Dudley reinforced the possibility of December liftoff, with FFR futures pricing the likelihood at 58% (previous: 50%); maintain mild overweight duration bias on USTs. Contrastingly, softer EU services PMI coupled with ECB’s Draghi comments propelled short dated EGBs higher; remain mild overweight on peripheral EGBs which remains a strong beneficiary of further ECB easing. Meanwhile, we continue to see a strong resistance for GBPUSD at 1.55 despite strong PMI data; the ball is likely to fall on BoE’s court to deliver an incrementally hawkish bias which could underscore a stronger GBP; add GBP on dips.

¨   AxJ Markets: While stronger Caixin services PMI does indicate positive signs of economic rebalancing, it remains unmatched by the moderation in China’s traditional growth drivers, keeping investors on a lookout for further PBoC easing and fiscal stimulus packages, dampening the attractiveness of CNY over the medium term. Elsewhere, yields on 2y ThaiGBs declined to 1.48% even as BoT held rates at 1.5%; weak price pressures and sluggish economic recovery is likely to keep BoT easing on the cards, supporting short dated ThaiGBs. In India, USDINR fell 0.26% overnight as services PMI rose to 53.2 in October (Sep: 51.3), contributed by new business expansions. We expect RBI to hold rates through 2015 but continue to seek opportunities to cut rates further in 2016 to support stronger growth expectations and investments; stay constructive on INR against regional AxJ peers.

¨   BoT’s status quo decision was within expectations, given the new BoT governor’s affirmation of an adequately accommodative monetary policy as he begun his term in October. With the infrastructural projects likely to reach a bottleneck after registering stellar growth early this year, we opine for the pace of domestic economy recovery to be increasingly relevant, which will build the case for another 25bps rate cut; maintain mildly bearish THB.