FW: RHB FIC Rates & FX Market Update - 1/10/14

1 October 2014

Rates & FX Market Update

EGBs Gained on Easing Optimism Following Weak CPI; Weak Tankan Survey May Discourage Abe’s Second Tax Hike Plans; RBI Held Rates

Highlights

¨    USTs traded stable amid a quiet economic calendar where we expect a strong string of data releases later today to spur risk appetite and bolster further gains for USD. EGBs gained ahead of ECB meeting tomorrow as weak EU data drove expectations for further ECB easing. Although the Tankan survey readings showed improvements for the manufacturing sector, contrasting from the non-manufacturing sector, the weak 3Q recovery is likely to discourage Abe’s plans for a second tax hike in 2015; JPY traded stable but hovered below the critical 110/USD.

¨    KRW fell 0.13% to 1055/USD even as another month of robust trade surplus was reported (trade surplus: USD3.36bn; exports: 6.8%; imports: 8.0%), with exports rebounding from July’s decline, providing relief for investors following weaker IP and manufacturing PMI data, where we recommend investors to unwind the long USDKRW position at 1060/USD. Weakness in Thai exports echoed customs data, where we also see business sentiment falling for the first time since the coup, dismayed by weak export demand. Despite the lackluster 2H recovery, THB remained firm against the strong USD, emerging as the best performer in emerging Asia in 3Q14. Jokowi’s influence within the Indonesian Parliament has been undermined by opposition coalition led by Prabowo, where Jokowi’s political struggle is likely to weigh on near term IndoGBs and IDR. Else, RBI held rates at 8%, citing inflation risk in meeting its 2016 inflation target of 6%; INR weakened against the firm USD where we see positive impacts from reform measures and outlook upgrade from S&P to stable limiting further large scale downside to the currency.

¨    EUR touched an intraday low of 1.2571/USD, triggering stop-loss orders following slowing inflation in EU ahead of ECB meeting. Weak data continued to pour out of Europe, reinforcing the case for additional easing stimulus in the form of asset purchases, in hopes to spur economic activity. Expect EURUSD (short) to remain a popular trade, supported not only by policy divergence but also by diverging economic prospects.