RHB FIC Rates & FX Market Weekly - 3/11/15

3 November 2015

Rates & FX Market Weekly

Global and AxJ Central Banks to Remain Accommodative In the Week Ahead

Highlights

¨   Global Markets: Various Fedspeak in the week ahead to remain a focal point for global investors, as the FOMC kept its options open for December lift off; US labour data over the next 2 months remains vital given the data-dependent nature of the rate decision. Non-farm Payrolls are expected to rebound from the weak September reading, while unemployment rate is expected to maintain at 5.1% y-o-y; we stay mild overweight USTs on policy differentials with major central banks. Over in UK, BoE may drop hawkish hints towards rate normalisation in its policy meeting in the week ahead, keeping us mildly bullish on GBP, as economic growth remains buoyed alongside bouts of labour market strength; nevertheless, we expect any rate hike to occur in 2016, lagging Fed's move.. In Eurozone, expect final manufacturing PMI to stabilize from September’s levels, alongside several activity indicators that could reveal hints of the bloc’s growth trajectory. Draghi’s speech in the week ahead is likely to reiterate his dovish inclination towards a potential easing in December; we remain mildly bearish on EUR over the near term. Elsewhere, while BoJ refrained from further easing, doubts over the credibility of BoJ to achieve its 2.0% CPI target by March 2017 will keep easing expectations lingering within the markets; keep a neutral stance on JPY where we expect the pair to consolidate within the range of 119.5-122.5/USD. Moving across to Australia, although retail sales are likely to remain stable this week, inconsistent strength in economic prints underscore the possibility of a 25bps rate cut when RBA reconvenes on 3 November; stay mildly bearish on AUD.

¨   AxJ Markets: Chinese PMI is likely to remain weak, directing attention to further details from the 13th Five Year Plan for further policy measures to bolster its traditional growth drivers. Despite early indications for China to moderate its 5Y growth target to 6.5%, we remain of view for further PBoC easing measures over 2016 amid the decelerating pace of growth, supporting our preference for short dated CGBs. Early plans for PBoC to remove capital controls for Shanghai FTZ is likely to offset bearish pressures arising from the ongoing capital outflows, supporting modest strength in CNY and CNH. Meanwhile, Singapore, Hong Kong and South Korea are scheduled to release manufacturing PMI data, with investors maintaining fairly subdued expectations, dampened by the slowing Chinese growth pace. However, expect the PMI data to be fairly marginal on the SGD and KRW, as investors continue to assess and adjust expectations for FOMC, which would influence the general strength of Asian FX. In Malaysia, expect BNM to maintain status quo over the OPR as MYR weakness could exert constraint on dovish inclinations to support economic growth; we continue to remain cautious on MYR leading into the trade data due in the week ahead. Meanwhile, BoT reconvenes on 4 November, where dovish inclinations should persist amid tepid inflation and growth drivers. We remain mildly bearish on THB, opining for the possibility of another 25bps rate cut this year to support the pace of economic expansion. October CPI and 3Q GDP are notable key data releases in Indonesia, with the former expected to soften further but still remain above BI’s official target of 3-5%, while higher government spending may lead to slight upticks on the latter; we stay cautious towards Indonesian assets amid renewed volatility as the Fed mulls rate normalisation. India’s services PMI could attract some attention, but liquidity and the FII limit remains the key impediment to Indian assets for now; stay constructive on INR.

Selected Trade Reviews:

¨   Trade Idea: Long 2y ACGB vs 2y UST (Entry (5Oct): 124bps; Current: 104bps; Stop Loss: 140bps; Target: 95bps)

Softening Chinese growth, evident from the less ambitious China 5y growth target, should weigh on key Australian exports and terms of trade

¨   Trade Idea: Short 7/20/40y JGB Fly (Entry (28 Sep): 61bps; Current: 55bps; Stop Loss: 75bps; Target: 46bps)

Expectations for downward movements on the 7y and 40y JGBs to be relatively limited given the rich valuations

¨   Trade Idea: Short EURGBP (Entry (28 Sep): 0.7370; Current: 0.7133; Stop Loss: 0.7575; Target: 0.7008)

Economic data prints out of UK continue to show relatively steady economic growth

Weekly Positioning

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