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

16 February 2016

Rates & FX Market Update

ECB’s Draghi Commitment Towards Price Stability Buoyed Gains in EGBs; Weak External Demand Weighed on Asian Exports

Highlights

¨   Global Markets: Strong gains on EGBs were seen following ECB’s Draghi testimony to European lawmakers as he indicated commitment towards further easing should downward risks to price stability compounds. Yields on 10y EGBs declined 2-20bps overnight, where we see the likelihood for ECB to reduce deposit rates by another 10bps to -0.4% alongside a c.EUR10bn expansion of PSPP in March; remain constructive on EGBs. EURUSD declined overnight to 1.1156 (-0.72%), where we continue to advocate short EURUSD positions in small clips, underscored by attractive interest rate differentials.

¨   AxJ Markets: Chinese exports and imports contracted by 18.8% and 11.2% y-o-y in January (Dec: -7.6%; -1.4%), while the wider trade balance (Jan: USD63.3bn; Dec: USD60.1bn) could sought to ease pressure on China’s balance of payments; we see the weakening growth drivers likely to weigh on Chinese corporate debt servicing ability which could further accelerate capital outflows; maintain mildly bearish CNY. Meanwhile, South Korea household debt expanded by 14.0% y-o-y to KRW641.3trn (2015 nominal GDP growth: +3.4%), compounding on BoK’s hesitation towards further rate cuts. BoK held rates at 1.5% today, but continue to keep its dovish stance as the central bank assesses the impact of Japan’s negative interest rate decision, which commences today; maintain neutral duration on KTBs. Elsewhere, Indonesia was not spared from the weaker global demand, with exports and imports declining by 20.7% and 17.2% y-o-y (Dec: -17.5%; -16.0%), with the marginal trade surplus providing brief comfort for investors. However, hurdles remained for the Indonesian economy, where we expect IndoGBs and IDR to remain susceptible to external gyrations, exacerbated by the twin deficits and weakening growth momentum; maintain mildly bearish IDR.

¨   CNY appreciated 1.19% to 6.496/USD as Chinese markets reopened, buoyed by the PBoC governor assertion of a stabilising balance of payments alongside the modestly stronger PBoC Yuan catching up on the USD weakness. We opine for currency stabilisation to remain one of PBoC’s medium term goal, but do not discount the likelihood for a mild depreciation over 2016 to address the overvalued REER; maintain mildly bearish.