FW: RHB FIC Rates & FX Market Update - 14/7/14

14 July 2014

Rates & FX Market Update

Risk Aversion Spurred Demand for Government bonds; Ukraine Outlook Upgraded to Stable

Highlights

¨    USTs and UK GILTs rallied overnight; investor’s flight-to-safety was spurred by heightened concerns over the health of Portugal’s banking sector where the second largest lender, Banco Espirito Santo, was downgraded 1-notch by Moody’s (B3) and S&P (B+). This further spurred gains in PGBs on Friday but insufficient to overwrite the weekly losses; 10y PGB/Bund spreads closed c.35bps wider w-o-w. The weak European market sentiment also affected the 3y Greek auction last Friday, drawing a 2.0x BTC at 3.5%, below par.  Meanwhile, Ukrainian bonds gained following S&P sovereign outlook upgrade to stable from negative, premised on the positive impact from IMF’s 2y USD17bn aid fund which has helped to stabilize Ukraine’s economy. BoJ’s meeting this week unlikely to unveil major surprises; attention turns to US with Yellen’s semi-annual testimony on the cards following better economic data.

¨    The KRW led Asian FX underperformance against the USD, weakening rapidly after approaching the USDKRW 1000 level as heavy positions unwound amid speculations for BoK to cut rates over 2H14 alongside a large supplementary budget. IndoGBs continued to underperform on heightened election risk; INR retraced lower overnight given better industrial output growth expectations while MYR was steady at 3.185/USD where we expect limited upside given the slew of positive data coming from the US. In Singapore, GDP growth unexpectedly contracted at 2.1% in 2Q14, (1Q14: +4.7%), attributed to the dip in manufacturing and tighter labour supply.

¨    USDMYR is expected to stay below its 50 day MA in the near-term following BNM’s 25bps OPR hike last week; likely to outperform regional FX relatively. Nonetheless, the MYR’s strength could be offset by a positive pickup in US economy which may warrant an earlier rate hike, following the Fed’s indication to end its QE in October.