FW: RHB FIC Rates & FX Market Update - 5/1/15

5 January 2015

Rates & FX Market Update

EGBs Rallied on Draghi’s Hint for Sovereign QE; IDR Weakened on Elevated CPI Compounded by Fuel Price Hikes

Highlights

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¨    Draghi hinted at the likelihood of sovereign QE amid deflationary risks compounded on the persistently soft manufacturing PMI, fueling speculation for QE implementation details as soon as 22 January; broad rally among EGBs with yields on the 10y declining 4-25bps while the EUR weakened below 1.20/USD. Similarly, the GBP depreciated 1.86% to 1.5293/USD, with investors pricing in higher financial volatility. We expect investors to begin pricing in added political risks in the country as early as 1Q15, where we opt to maintain a neutral view for 2015. Meanwhile, the UST curve bull flattened, bolstered by the softer ISM manufacturing and a further slide in Brent oil prices where we expect yields on USTs to remain subdued, supported by relative attractiveness versus the EGBs.

¨    Asian currencies traded weaker against the surging USD on Friday, where IDR marked the worst overnight performance versus the USD (-1.27%) following a series of poor data releases; December’s CPI surged above expectations to 8.36% y-o-y while trade balance slipped into deficit. Despite the lackluster data, we maintain our neutral IndoGB duration and IDRUSD view over 2015, expecting encouraging fiscal reforms including the fixed fuel subsidy to strengthen the fundamentals and boost investors’ confidence. Elsewhere in the region, a further slide in Brent oil prices weigh on the MYR; USDMYR edged above the 3.536 this morning, tracking weakness in Brent oil closely. RHBRI’s expectations for BNM to stand pat this year is likely to offer little support to the weak MYR, despite USDMYR pair currently trading in the overbought region.

¨    Rife speculations which followed Draghi’s hints on ECB sovereign QE drove the EUR below 1.200/USD, into oversold region where we took profit on short EURUSD positions. We see a possible pullback in the EURUSD towards 1.2156 in the period leading up to ECB’s 22 January meeting. Resultantly, we recommend investors to short on strength capitalizing on the bearish outlook for EURUSD.

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