RHB FIC Rates & FX Market Update - 2/12/15

2 December 2015

Rates & FX Market Update

Weak ISM Manufacturing Unlikely to Dent Liftoff Expectations; RBA & RBI Held Rates; AxJ Manufacturing PMI Remained in Contraction

Highlights

¨   Global Markets: ISM manufacturing dived to 48.6 (October: 50.1), with high levels of inventories weighing on orders and production. While USTs gained overnight amid repositioning in the market, it is unlikely to dent expectations towards the December FFR hike as investors await Fed’s Yellen speeches and NFP; maintain mild overweight on USTs. Meanwhile, EUR climbed to 1.06/USD, attributed to the softer USD alongside improvements in the region’s unemployment figures. The encouraging data however is unlikely to allay ECB easing expectations where we opine for ECB to deliver 10bps of deposit rate cut and extend the length of PSPP by 6 months at the minimum; keep mild overweight duration on EGBs, with peripheral EGBs likely to outperform the core on better risk appetite. While RBA’s decision to stand pat was within expectations, strong manufacturing and building approval data yesterday was supportive of RBA’s sanguine outlook, boosting AUD higher to 0.7322/USD (+1.31%); 3Q GDP expanded by 2.5% y-o-y, outperforming consensus (2.4%) which could continue to support modest strength on AUD over the week.

¨   AxJ Markets: AxJ Manufacturing PMI data remained lackluster, with China, South Korea, Malaysia and Indonesia reporting contractions in the manufacturing sector. We opine for weaker demand from China to remain a drag on the region. Indonesia’s CPI fell within BI’s inflation target of 3-5% for the first time in 12 months, supporting the central bank’s eager bias towards further BI rate cuts next year to support economic and credit growth; remain mildly bearish on IDR, underpinned by weak fundamentals, with easing speculations amid rising US rates likely to exacerbate the bearish pressures. Elsewhere, RBI held rates at 6.75%, where we expect RBI to remain on the sidelines to allow the YTD 125bps rate cuts to filter through the economy; maintain neutral on INR.

¨   Strong retracement in USD overnight failed to benefit the GBPUSD, which inched higher by 0.17% as UK PMI disappointed. We continue to hold a mildly bullish view on GBP, with the expansion in manufacturing PMI affirming the economic recovery even as BoE’s Carney cautious stance limited upward moves on GBP as he downplayed the exigency to lift rates, citing a variety of macroprudential tools to combat any financial stability risks.