Subject: RHB FIC Rates & FX Market Update - 23/9/14

23 September 2014

Rates & FX Market Update

Core EGBs and Gilts Led Rally in DM Govies; Chinese HSBC PMI Surprised on Upside but Optimism Likely to be Short-Lived

Highlights

¨    USTs advanced for a third day following the dismal set of home sales data, where Dudley called on patience towards the first FFR hike given that inflation remained well below the Fed’s target. The Gilts curve bull flattened overnight, where long-end Gilts matched the outperformance in Bunds and Oats on mounting QE expectations from the ECB and earlier BoE rate hikes, where the latter was also evident in the higher SONIA forward rates. Despite the strong ACGBs overnight rally on growth concerns in China, which suggest better buyers domestically, the AUDUSD pair fell through its near term support of 0.8897 to a low of 0.8855, largely due to better buying on its major partners.

¨    In Asia, CGBs rallied overnight on expectations for China’s flash manufacturing PMI to signal a slowdown but the data pointed towards a sanguine 50.5 this morning driven largely by improved external demand. We opine that the upside surprise is likely to be short-lived as the country continues to tackle its slowing growth, where we maintain a mild overweight on CGBs which should continue to benefit from PBoC’s monetary easing measures. Else, Indonesia’s budget is expected to feature a 1.6% cut in energy subsidies for FY15, largely from electricity tariff and power subsidy cuts; fuel subsidies will still increase given higher costs for the same volume; the Parliament will vote on the budget later this week.

¨    The AUD slid (-0.71%) against the USD, breaking its near term support of 0.8897 on better buying in its major trade partners. The AUDUSD pair continues to hug the lower Bollinger band while RSI continue to suggest an oversold pair. Following the better than expected Chinese PMI, we may see the AUDUSD squeeze higher where the attractiveness of the AUD carry should continue to lure investors.