FW: RHB FIC Rates & FX Market Update - 15/10/14

15 October 2014

Rates & FX Market Update

Disappointing Eurozone Data Intensified Global Growth Pessimism; BoK Lowered Interest Rates and 2015 Forecasts

Highlights

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¨    Risk-off sentiment persisted overnight; DM govies extended rally; UST and Gilt curve gapped 1-9bps lower given the dismal Eurozone and UK CPI (Sep CPI: 1.2%) which stoked further speculations of a delay to the tightening cycle amid global growth woes. While 10y UST has met our 2.2% technical target, we will reassess our target as the situation evolves. Currencies were broadly softer against the USD overnight, led by GBP. Weaker EU data continued to garner attention, including moderating IP, ZEW survey expectations at 2012 lows and potential rejections in France and Italy’s budgets given failing to abide EC deficit targets amid showing signs of economic fatigue.

¨    KTB curve bear flattened as investors priced in the 25bps rate cut by BoK to 2.0% earlier this morning in a bid to spur the domestic economy after unemployment remained flat (3.5%) in September. BoK’s decision to cut rates followed a reduction in CPI and GDP forecasts for 2015 to 2.7% (-0.3%) and 3.9% (-0.1%) respectively. We assign a low likelihood for any further rate cuts from BoK; expect policy makers concerned over potential capital outflows and policy divergence. MGS slightly fell overnight where the 15y MGS reopening garnered a softer BTC of 1.78x (Feb: 2.28x) given the softer yield cut-off at 4.1%. Else, Gsecs rallied as the lower than expected WPI print at a 5 year low added to easing inflationary pressures in September (2.38%) following the easing CPI print. The faltering INR (-0.52%) failed to deter rising gold imports (+450%), leading to a wider trade deficit in September.

¨    GBP pressured lower, breaking the 1.6051/USD support following the weaker y-o-y CPI which hit a 5-year low of 1.2% in September. This raised speculations for BoE to push out the timeline of its first rate hike. We remain neutral at this juncture, eyeing a better job data today which may hold the pair at current levels. A break below our support (November 2013’s low) could suggest some tactical long positions.

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