RHB FIC Rates & FX Market Update - 15/2/16

15 February 2016

Rates & FX Market Update

Modestly Stronger PBoC Yuan Fixing as Chinese Markets Reopen

Highlights

¨   Global Markets: USTs retraced from six consecutive days of rally ahead of the President’s Day weekend, with 10y yields climbing 9bps to 1.748% on better-than-expected retail sales (0.2% m-o-m; consensus: 0.1%) and strengthening oil prices despite the lackluster University of Michigan sentiment; we continue to recommend for a mild overweight duration stance, underscored by lingering bouts of risk aversion which could continue to support a bull flattening UST curve. Meanwhile, attention was on GDP data releases within the EU region, where weak performance from the peripherals in 4Q weighed on the aggregate EU print (4Q: 1.5%; 3Q: 1.6%). German’s 4Q GDP however, expanded 2.1% y-o-y (3Q: 1.8%), supported by the stronger domestic demand, albeit limited by weakness in global demand. Peripheral EGBs outperformed its core counterparts amid the brief recovery in sentiment, where we continue to hold our preference towards core EGBs over peripherals, premised on further ECB easing and renewed political and banking concerns towards peripheral economies.

¨   AxJ Markets: Chinese markets reopen today from the festive holidays with a modestly stronger PBoC Yuan fixing at 6.5118/USD (+0.3%), compared to CNH appreciation (+0.9) over the same period, which could indicate their overall preference for the currency to remain on the softer side over the medium term; maintain mildly bearish on CNY with a YE16 target of 6.8/USD. Elsewhere, India’s CPI inched modestly higher to 5.7% y-o-y (Dec: 5.6%), driven by higher food prices resulting from delays in the winter crop planting but remained comfortably below the RBI’s target of 6%. Investors await the February 29 Union Budget, where focus remains on PM Modi to deliver further economic reforms to support long term potential growth; stay neutral INR.

¨   Japan’s economy underwhelmed in the 4Q, contracting by 1.4% q-o-q annualised, with weakness in the domestic economy cited as the largest contribution to the contraction. With the YTD appreciation of c.6% in JPY likely to exert further pressure on the export dependent economy and fuel risk aversion in consumption and investment sentiment, we opine for further BoJ easing, likely in the April MPM; maintain mildly bearish JPY.