RHB FIC Rates & FX Market Update - 22/4/15

22 April 2015

Rates & FX Market Update

Soft 30y Gilt Auction Demand; Japan Prints First Trade Surplus in 2 Years; Philippines Rejects all Bids at 10y Re-opening Auction

Highlights

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¨    Investors remain jittery ahead of the elections given the softer demand at the 30y Gilt auction. Its BTC of 1.43x was lower than 1.58x in February, despite drawing an all-time low yield of 2.343%. Meanwhile, the German ZEW survey (current situation) rose to its four-year high of 70.2 for April (March: 55.1), beating consensus’ estimates for a 56.5 rise as survey participants were largely optimistic for an accelerating recovery ahead. This was despite looming uncertainties over a Greece default where Greek municipalities intend to reject the Government’s decree to transfer cash reserves to meet its financial obligations. While the temporary boost in risk appetite sent German Bund yields higher overnight, we expect the core-peripheral EGB spreads to tighten as ECB’s PSPP is expected to keep a lid on the upward yield pressure among higher rated peripheral EGBs.

¨    Over in Asia, the Philippines Auction committee rejected all bids at the 10y re-opening auction, where the average bid rate of 3.659% was 9bps higher than 3.568% average yield at the secondary market, which may suggest investors’ perception that RPGBs remain overvalued amid the Treasury’s efforts to keep a lid on borrowing costs. Separately, MYR fell 0.48% against the USD as oil prices retreated from its YTD high of USD63/bbl; the mounting geopolitical tensions in the Middle East could sustain oil prices at current levels, supporting the MYR. Else, Hong Kong inflation remained elevated at 4.5% in March, where we opine for HKMA’s intermittent FX intervention to keep USDHKD above 7.75/USD and likely to continue exerting upward price pressures.

¨    JPY consolidated within the 118.50-121.00/USD range amid a quiet week where we saw Japan printed its first trade surplus in 2 years, helped by the relatively subdued oil prices, keeping the cost of energy imports low. We opine for any strength in JPY to be relatively short term in nature, expecting for the USDJPY pair to trend towards our YE15 target of 125, underpinned by the diverging monetary policies.