FW: RHB FIC Rates & FX Market Update - 31/7/14

31 July 2014

Rates & FX Market Update

10y UST Rebounded Above 2.5% on Strong GDP Data; FOMC Minutes Less Dovish; BSP to Hike Overnight and SDA Rate by 25bps

Highlights

¨    Fed slowed asset purchases by another USD10bn to USD25bn yesterday. 2 notable changes within the less dovish FOMC statement included the acknowledgement of the improving inflation and labour market; unemployment was no longer “elevated” while highlighting the persistent slack in the market. The relatively “measured” policy progress invoked dissent by Fed hawk Plosser who cited that the forward guidance for FFR does not recognize economic improvements to date. The less dovish sentiment was further bolstered by the strong annualized GDP (2Q: +4.0%; 1Q: -2.9%) and core PCE data (2Q: 2.0%; 1Q: 1.2%) where 10y UST 10bps to close at 2.56%. In Europe, government bonds tracked UST losses despite the weaker Eurozone CPI data due to declining energy prices; EURUSD broke the 1.34 support level to an 8 month low at 1.3366. Elsewhere, Japan’s IP tumbled to -3.3% m-o-m in June, the biggest monthly decline since 2011, underscoring the weak domestic demand and poor pace of export recovery.

¨    Mixed Asian bond markets overnight while developed AxJ currencies remained firm yesterday against the stronger USD. Ahead of Chinese manufacturing PMIs today, CNY and CNH continued extending gains despite the weaker yuan fixing, buoyed by inflows expectations. Attention turns to BSP’s meeting today where investors are expecting a 25bps overnight rate hike which have been priced in together with a +25bps on the SDA rate.

¨    THB spot led Asian FX outperformance against the USD in July (+1.5%), trailing the IDR (+2.6%). The positive performance was bolstered by developments on the fiscal front and General Prayuth’s comment last week for June’s exports to grow 7.2% y-o-y, which we opine to be unachievable. We maintain our long MYRTHB call, with a review target level of 10.364