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

8 August 2014

Rates & FX Market Update

DM Govies Extended Gains; BoE and ECB Held Policy Rates Status Quo; AUD at YTD Low as Unemployment Rate Rises

Highlights

¨    DM govie yields continued to decline on flight to safety; 10y UST down 6bps to 2.41%, last seen in June 2013. Similarly, 10y Bund fell to a YTD low of 1.1% yesterday where the unconventional support given by the ECB to revive the Eurozone economy could pressure Bund yields lower. BoE left key rate unchanged at 0.25% without an accompanying statement; watch the bank’s Quarterly Inflation Report next Wednesday and minutes on 20 August for cues on UK’s labour market. ECB maintained its accommodative policy as well as key rate and deposit rate at 0.15% and -0.1% respectively. The bank remains cognisant of fattened tail risks, highlighting its readiness to response with ABS purchases while TLTRO remains on track for September’s implementation. Meanwhile, ACGB yields fell 9-11bps in reaction to the dismal Australia unemployment rate at 6.4% in July (June: 6.0%), suggesting a prolonged period of low interest rates. We suggest investors to watch the longer term unemployment trend, where this blip could be a one-off anomaly.

¨    Asian currencies were broadly weaker against the USD overnight given the weak sentiment. In Thailand, the Junta’s proposal to lift the martial law is underway following signs of stabilization post-coup; consumer confidence rising to 78.2 in July. Else, the Aquino administration proposed of PHP2.606trn (+15.1% y-o-y) for FY15 while keeping fiscal deficit at 2.0%, shifting its funding needs from debt borrowing to revenue generation; the government aims to borrow only c.PHP700bn in 2015 (-7.0% y-o-y). 

¨    AUDUSD fell 0.88% overnight at 0.9269 following signs of weaker outlook in Australia’s jobs market. We expect the pair to trade below its 100-day MA of 0.9332 in the immediate-term as we anticipate RBA to keep cash rates low for a prolonged period, exacerbated by the stronger USD, and in line with our short AUDUSD target of 0.9000.