RHB FIC Rates & FX Market Update - 27/3/15

27 March 2015

Rates & FX Market Update

Safe Haven Play to Remain a Recurring Play Amid Challenging External Conditions; 10y UST Topped 2.0%; EUR Tested 1.10/USD

Highlights

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¨    UST extended losses following the sluggish USD29bn 7y UST auction, awarded at 1.792% with the weakest BTC since May 2009 (2.32x); the last 7y auction sold at 1.834% in late February. UST yields was further weighed by initial jobless claims at its 5-week low of 282k. 10y UST topped 2.00% intraday; UST-Bund spreads widened back towards 178bps, above the 6m mean of 155bps. We expect the widening trend to persist, particularly as US continue to gain a firmer footing in its recovery. Aside, geopolitical risks resurfaced with news of Saudi airstrikes where Brent crude oil prices closed at a 3w high and likely to bolster further risk aversion heading into quarter-end. Resultantly, EUR tripped after rising to a 3w high (>1.10/USD) as investors squared intraday longs; expect the weak sentiment to be further amplified by dollar demand on quarter end.

¨    In Asia, core inflation in Japan slowed for the 7^th straight month on weak consumer spending; ex-sales tax impact showed inflation at 0%; 2y JGB auction well covered despite low YTM at 0.03%. Else, BSP kept rates unchanged at 4.0% where President Aquino remains confident of Philippine’s growth even amid higher rate given high liquidity; we expect BSP to remain status quo for FY15. Aside, Singapore’s IP undermined expectations by more than 1.0% leading to a cut in investors’ growth expectations; we continue to expect further easing at the MAS’ meeting in April to accommodate further SGD weakness. KRW and INR led Asian FX losses overnight, expect India’s fiscal and market developments to remain constructive for the INR.

¨    KRW led overnight FX weaker against the US after consumer confidence eased to a 3-month low, bolstering BoK rate cut expectations but investors remain divided when pricing in Fed’s eventual rate hike expectation. 1m implied volatility for the USDKRW remains elevated versus its average. Roll existing long USDKRW positions; YE15 USDKRW forecast at 1,180.