RHB FIC Rates & FX Market Weekly - 22/2/16

22 February 2016

Rates & FX Market Weekly

G20 Summit to Set Market Tone; Global and Regional Economies Due to Release 4Q GDP Data in the Week Ahead

Highlights

¨   Global Markets: G20 finance ministers and central bank governors are scheduled to meet in the week ahead, where the fragile global economic recovery is likely to dominate discussions; expect joint commitment towards global growth and financial stability, while any agreements on coordinated currency policies to restore balance remains a challenging feat. In the US, various Fedspeak in the week ahead to remain a focal point ahead of the March FOMC meeting, where investors attempt to ascertain the Fed’s policy inclination; expect a mixed FOMC over the near term as policymakers debate the feasibility of further FFR tightening. Economic data in the week ahead to remain a driver of market sentiment, with flash PMI, home sales, durable goods and GDP key to watch; stay mild overweight UST duration. In UK, 4Q GDP is expected to remain unchanged from the previous estimate, with EU talks likely to remain a bigger driver of the currency; stay neutral GBP. EU CPI due in the week ahead is expected to remain unchanged at 0.4% y-o-y, and is unlikely to materially influence ECB’s decision in March amid rising macroeconomic risks; maintain mildly bearish stance on EUR. In Australia, private capex is likely to be a major domestic driver in the week ahead, where a poor print (consensus: -3.0% q-o-q SA) likely to weigh on Australia’s domestic recovery and the AUD; remain mildly bearish AUD. Over in Japan, manufacturing PMI and CPI data is likely to remain closely watched amid renewed expectations for further BoJ easing while we eye the public address by BoJ’s lone dissenter, Kiuchi, which could shed light behind his hawkish stance amid the tepid inflationary pressures and mounting downside risk in the global economy; expect consolidative movements on the USDJPY pair in the week ahead.

AxJ Markets: Quiet economic calendar in China is unlikely to deter market chatters, as Chinese authorities participate in the G20 summit amid increasing scrutiny on China’s growth momentum. We expect little changes on the Chinese government’s stance towards proactive expansionary fiscal policies where we opine for further details likely to be revealed only in the National People’s Congress held in the first week of March; expect CNY stability to persist through the week ahead. Meanwhile, while key data, namely GDP, CPI, and unemployment data out of Singapore and Hong Kong is unlikely to be a large driver on the SGS and HKGB market, a softer 4Q GDP print in Singapore challenging the FY 2.0% baseline projection could fuel the likelihood for MAS to ease the slope in April; maintain neutral on SGD with a status quo MAS remaining as our base case. Elsewhere in South Korea, amid the quiet economic calendar, we expect KRW to remain soft over the near term as investors continue to price in elevated BoK rate cut expectations. Over in Thailand, the weak start to the country’s exports are unlikely to introduce any optimism to markets, where we remained positioned for a 25bps BoT rate cut in 2Q16 which could be constructive for short dated ThaiGBs. In Malaysia, foreign reserves are unlikely to deteriorate given stabilising macroeconomic conditions, with CPI to remain under 3% on soft price pressure; stay mildly bearish MYR over the near term, with external headwinds, volatile oil movements and BNM governor’s transition to pose various uncertainties. On little key data in Indonesia and India due in the week ahead, expect movements to remain driven by global markets and month end rebalancing flows.       

Selected Trade Reviews:

¨   Trade Idea: Tactical 7/20y JGB Flattener (Entry (17 February 2016): 88bps; Current: 87bps; Stop Loss: 100bps; Target: 70bps)

Limited inclusion of funds under the negative deposit rate scheme could signal BoJ’s flexibility for deeper rate cuts.

¨   Trade Idea: 5/10y ACGB Flattener (Entry (13 July 15): 79bps; Take Profit (10 February 16): 55bps)

Unattractive risk reward ratio suggests low likelihood to revisit trade over the near term.

¨   Trade Idea: Long INRIDR (Entry (29 Jan 16): 203.08; Current: ; 197.22; Target: 213.4; Stop Loss: 196.0)

Risk on sentiment likely to favour IDR vs INR given high nature of trade, adding risk to the position.

Weekly Positioning

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