FW: RHB FIC Rates & FX Market Update - 6/8/14

6 August 2014

Rates & FX Market Update

DM Govies Pared Gains; RBA and RBI Left Rates Unchanged

Highlights

¨    USTs were steady overnight, 10y remains below 2.5% (current: 2.484%) despite bullish factory order and ISM non-manufacturing prints in US which should further bolster speculations for an earlier FFR hike. European PMI data was mixed with positives driven by the core European economies; govies broadly pared gains. In Australia, RBA left cash rates at 2.5% with some dovishness in the accompanying statement, citing the appropriateness of its currency policy and the overvalued AUD which extended its weakness to 0.9305/USD. We continue to expect RBA to remain on hold through 2014 and a bearish take on the AUDUSD pair in the near to medium term. Japan’s services PMI expanded alongside improving business activity, supporting BoJ to stand pat next week.

¨    RBI left repo rates unchanged at 8% amid a mildly cautious tone, balancing the need to contain inflationary pressures while maintaining growth; this left interpretation for future action open-ended. On balance, this is less conducive for Golsecs where the 10y Golsecs added 11bps to 8.61, alongside better IP and manufacturing PMI data. IndoGBs were weaker overnight give slowing GDP growth, adding pressure for the government to push through fuel subsidy reforms while keeping in check domestic price pressures; we maintain a neutral stance on IndoGBs at this juncture. Else, THB weakened against the USD ahead of BoT’s MPC meeting where we expect rates to remain on hold later today.

¨    EUR consolidated at 1.3365 yesterday and remains weak ahead of ECB meeting tomorrow. The downward momentum is expected to persist where the currency broke its 1.345 strong support in late July. We hold a medium-term bearish view on EUR (3Q14f:1.320/USD), further weighed by a stronger USD amid better US data against weak recovery in the Eurozone.