RHB FIC Rates & FX Market Update - 28/4/15

28 April 2015

Rates & FX Market Update

EGBs Rose as Greece Reshuffles Negotiating Team; Fitch Downgrades Japan to A; PBoC to Consider Purchasing Municipal Bonds

Highlights

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¨    Muted movements were seen on USTs, with 10y yield inching higher by 1bp to 1.92% as softer expansion in the US services and composite PMI continued to underscore lingering concerns of a likely dovish Fed statement ahead. We opine the string of disappointing data dampens the case for June rate liftoff and further moderating the USD appreciation trend. Over in EU, investors’ focus remained fixated on Greece as Prime Minister Tsipras reshuffled its bailout negotiation team following three months of stalemate, lifting sentiment in Europe; yields on 10y peripheral EGBs declined by 8-9bps overnight. While the change in negotiator may facilitate easier discussions given better connections with EU, ECB and IMF officials, we opine for optimism to likely be short-lived as Greece continues to stand firm on their anti-austerity stance which can delay resolution; maintain short bias on EUR.

¨    Meanwhile, Fitch has downgraded Japan’s sovereign rating to A with a stable outlook, citing the lack of structural fiscal measures implemented in its FY15 budget to offset the delayed October 2015 sales tax hike, adding to heightening concerns of Japan’s elevated government debt amid efforts to boost economic growth; JPY fell against the softer USD to 119.09. Meanwhile, we saw downward yield pressures across the JGBs as BoJ offers to purchase govies at a premium, signalling tighter liquidity in the secondary market. Elsewhere, China takes another positive step on reforms as it plans to reduce the number of SOEs from 112 to 40 through mergers and restructuring; expect demand for CGBs to remain firm this week as investors appreciate the reform details, alongside PBoC’s plan to purchase municipal bonds.

¨    CNY fell by 0.41% overnight, declining to its 1 month high of 6.22/USD following PBoC’s plan to consider purchasing municipal bonds, following up on previous plan to allow the municipals to convert existing debt into bonds. Weakness in the CNY was in spite of the stronger PBoC Yuan fixings, and we expect another 25bps PBoC rate cut alongside 50-100bps RRR cut to weigh on the strength of CNY