FW: RHB FIC Rates & FX Market Update - 5/2/15

5 February 2015

Rates & FX Market Update

Market Risk Sentiment Undermined by Greek Woes and Volatile Oil Prices; PBoC Fixed the Yuan Stronger Despite China’s 50bps RRR Cut

Highlights

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¨    USTs extended rallies as risk aversion stemming from ECB’s decision to limit Greek debt as collateral to secure funding overshadowed the positive US ADP jobs data release in January. EUR slid 1.17% overnight against the USD on renewed pressure that Greece may face a cash crunch as new the Prime Minister pledged to not accept more ECB bailout loans, leading to further setback in the ongoing debt restructuring negotiation.; 10y bund at 0.367% remained lower than the 10y JGBs at 0.381%. Separately, Gilts broadly fell as UK’s services PMI printed a strong 57.2 in January, indicating resilience in the UK services sector, supporting growth in 1Q15.  Meanwhile, AUD was pressured slightly lower following the unexpectedly lower Australia retail sales, where we maintain our medium term bearish view on the AUD on prospects of further RBA easing.

¨    Asian govies and currencies were mostly mixed with MGS and MYR topping outperformance as the improving sentiment amid rebound in oil prices spurred market confidence. Elsewhere, PBoC surprised markets with a 50bps cut in reserved requirement ratio (RRR) to 19.5% ahead of the seasonally tight liquidity during the Chinese New Year Period where we see the slew of slowing PMIs compelling the PBoC to undertake a broad based easing; the CNY edged higher by 0.28% as PBoC continues to fix the Yuan stronger, controlling the pace and extent of depreciation. Aside, HSBC PMI (Composite: 51pts; Services: 51.8) prints continue to slip in January highlighting the slowdown in the Chinese economy; CGBs were largely unchanged.

¨    AUDUSD continued to slide following the surprise cut by RBA, where the decision was mainly driven by softening commodity prices which could lead to further disinflationary pressures. We remain bearish on the AUD, with medium-term target of 0.70 where we see further potential cut in policy rates, with near-term technicals suggests strong downward momentum to persist.

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