RHB FIC Rates & FX Market Update - 21/4/15

21 April 2015

Rates & FX Market Update

Greece Overshadows European Headlines as it Prepares to Pay Creditors; RBA’s Stevens Dovish Remark Sent AUD Tumbling

Highlights

¨                   

¨    Fed’s Dudley remained hopeful of a Fed rate hike later this year, even as inflation and unemployment remains soft at this juncture; RHBRI’s expectations remains for a September rate lift off as recovery continues to be sluggish. Over in the Europe, EUR weakened while core-peripheral EGB spreads tightened as Greek government issued a decree forcing municipals to transfer cash reserves to the Bank of Greece to pay government salaries, pensions and international creditors to alleviate a potential default amid the deadlock on reform negotiations to release bailout funding. Over in UK, modest gains were seen on Gilts while GBP fell from 1.50/USD resistance, as investors remained cautious given the uncertainty over the outcome of elections. However, we expect the rebound in retail sales ahead to temporarily offset the bearish momentum in GBP.

¨    Over in AxJ, PBoC easing was insufficient to sustain any strong reprieve among Asian currencies. PHP remained stable even as Philippines current account turned into deficit (-USD244m), compared to the PHP985m recorded February. Separately, yields on 3y KTBs stayed below the 7-day repo rate as expectations for the softer 1Q GDP print reinforced the case for further BoK easing even as the elevated household constrains policy maneuverability; demand for 10y KTB issue remained strong at 3.79x, despite a higher cutoff yield at 2.16%. In Indonesia, Halim Alamsyah will be replaced by Erwin Rijanto as the deputy BI governor, known for his advocate towards tailoring macro policies for different regions of Indonesia; USDIDR continued to hover below the 13,000 resistance.

¨    The dovish remark by RBA’s Governor Stevens continues to favour our call for a bearish AUD with a target of 0.700/USD. He emphasized the RBA’s recent accommodative monetary policy stance from the meeting minutes,    and remain skewed towards the high likelihood of further weakness in the currency. We believe a break below 0.7696 could strengthen a near-term bearish movement.