FW: RHB FIC Rates & FX Market Update - 7/8/14

7 August 2014

Rates & FX Market Update

Mounting Geopolitical Tensions to Weigh on Risk Appetite; BoT Held Policy Rates; Strong MYR Weighed on Exports

Highlights

¨    Safe haven price action dominated core European government bond flows upon fresh catalysts driven by growing tensions between Russia and the West, 10y Gilts and Bunds down 7bps each where the latter marked a new low at 1.1%. The weak sentiment in Euro area overnight was further exacerbated by an unexpected contraction in Italy’s GDP growth as well as disappointing German factory and industrial orders. Similarly, UK’s industrial output in July slowed, which may in turn hamper GDP growth, and ease pressures on BoE to raise interest rates earlier than anticipated. Investors are expected remain cautious going into BoE and ECB meetings later today. We opine that BoE minutes due 20 August should play a larger role than the post-MPC chatters while the ECB could reiterate details of the TLTRO.

¨    BoT held its policy rate at 2.0% in line with expectations; USDTHB was broadly stable overnight. The economy have begun to show signs of stabilizing following the military coup, supporting our view for policy to tighten only after elections later next year. In Malaysia, the stronger MYR partly contributed to a slowdown in exports growth in June, at +7.9% y-o-y (May: +16.2%) in addition to a higher base effect. Additionally, imports slowed to +9.2% y-o-y in June (May: +11.8%), resulting in a narrower trade surplus of MYR4.0bn (May: MYR7.5bn). Aside, INR led Asian currencies weaker overnight, weighed by better US data.     

¨    JPY found respite on safe haven flows amid heightened geopolitical tensions.  USDJPY breached its support of 102.27, where stop loss on short orders was seen at the support area. We expect further upsides on the JPY to be capped by the stronger USD, maintaining our bearish view of USDJPY (3Q13: 105). BoJ announcement tomorrow is unlikely to present any major surprises.