FW: RHB FIC Rates & FX Market Update - 1/8/14

1 August 2014

Rates & FX Market Update

Subdued Eurozone CPI Supported Govies Demand; BSP Hiked Rates by 25bps; Currencies Broadly Weaker Against Firmer USD

Highlights

¨    Portuguese weakness grabbed headlines yesterday on Banco Espirito Santo woes as the local central bank moves in to manage the troubled situation alongside the lackluster inflation in Europe (0.4%) and unemployment (11.5%) data; 10y PGB up 10bps. Still, we opine for ECB to stand pat at its next meeting (7 Aug) as it continues evaluating the impact from the introduction of June’s stimulus. Attention turns back to US tonight, with NFP, PCE, ISM and confidence index on the cards; our economics team expects NFP to print at 238k (Jun: 288k) and unemployment to stay at 6.1% (Jun: 6.1%) in July, largely in line with general expectations.

¨    Asian currencies were broadly weaker; with KRW and MYR trailing THB losses. Fading euphoria over Thailand’s recovery led to a weaker THB despite the trade and current account surplus which was supported by a strong rebound in Thai exports (Jun: 3.8%; May: 6-1.2%). The Thai King approved a 200-member interim parliament without any political affiliations; we remain cautious towards Thailand’s reforms and its eventual transition to democracy late next year. Aside, BSP hiked overnight rates by 25bps as a preemptive measure to manage inflationary risks from power, transport fares and wages; PHP gapped higher this morning, breaching its 50day while its 1m volatility jumped 10bps as investors unwound equity positions. The central bank also cut inflation forecast for 2014 to 4.33% (-0.07%) while we expect BSP to follow with another 25bps hike in 2014.

¨    Despite safe haven demand for hard currencies amid worsening geopolitical developments, JPY failed to sustain its strength against a firmer USD. We target to take profit on our tactical long USDJPY ahead of BoJ MPC where Kuroda is likely to affirm optimism in the QQE stimulus, dampening the JPY depreciation momentum, despite skepticism from other BoJ members.