FW: RHB FIC Rates & FX Market Update - 23/2/18

 

 

 

23 February 2018

 

 

Rates & FX Market Update

 

 

Higher DM Yields Pressured Indonesian Rates Higher

 

Highlights

 

¨   Global Markets: The accounts to the ECB January meeting reaffirmed that a change of its policy guidance is likely in 1H18, while acknowledging it was too premature to do so in January despite rising inflation pressure. The EURUSD subsequently rose above our support area at 1.2200/1.2225 (+0.37% d-o-d); we remain mildly bullish EUR. On the other side of the Atlantic, the broad Dollar rebound ended below our resistance - 90.20 for the DXY -  against the backdrop of a stronger Euro and a rising stock market. The USD29bn auction of 7-year Notes also disappointed, drawing the highest yield since 2011, with a BTC ratio at 2.49 (2.73 for the last auction). Bid to cover ratios of this week USD258bn auctions of Bills and Notes declined; although not yet alarming, we remain concerned over the growing debt supply/demand imbalances as a natural debt absorber, the Fed, unwinds its balance sheet while Treasury issuances are expected to nearly double this year in the wake of an increasing budget deficit; remain neutral UST.

¨   AxJ Markets: Over in Indonesia, 3y and 10y IndoGB yields jumped c.17-18bps overnight, after US 10y yields came close to the 3% psychological level in the previous day, and despite the fact that the nation’s bonds were added into the Bloomberg-Barclays index. Higher DM yields should continue to exert downward pressure on EM assets over the medium term, particularly Indonesia given the country’s high foreign ownership of IndoGBs alongside running external and fiscal deficits. Still, recent accumulation of foreign reserves and investors’ relatively optimism towards the country should help cushion small spikes in volatility; stay neutral IndoGBs.

¨   Over in Malaysia, foreign reserves as of mid-Feb dipped marginally to USD103.5bn, likely due to the spike in volatility seen early-Feb. The pair remained comfortable under the 4.00 psychological resistance, and we expect it to be the case over the coming weeks, even as Malaysian rates faced headwinds including higher global rates and BNM tightening; stay mildly constructive on MYR.