RHB FIC Rates & FX Market Weekly - 24/4/15

24 April 2015

Rates & FX Market Weekly

FOMC to Steer the USD; Electoral Uncertainty in UK to Build into the GBP and Gilts Market; Expect Firm Demand at Inaugural SGS Auction

Highlights

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¨    Global Markets: Amid the multitude of data released in US, investors eye the FOMC statement and 1Q GDP data where we expect a status quo decision and a likely softer GDP print due to cold weather and port delays to keep USTs below 2% and keep auction demand strong while rendering the short term movements of USD to remain relatively directionless, before further clarification from the Fed on its rate hike schedule. Electoral uncertainty in UK will continue to build into the GBP and Gilts market where the tight race may see a repeat of 2010’s elections which saw the GBP decline sharply by c.900pips in the 2 weeks after a hung parliament was formed. In EU, markets are likely to digest EU’s Greek debt bailout meeting, leaving investors jittery over the fallout from a possible “Grexit” where we expect some widening in core-peripheral spreads albeit contained by ECB’s PSPP; this should also see a softer EUR following poor PMI data where the pair may trade within the 1.065-1.070 region. A heavy data week in Japan, where we expect USDJPY to drift higher as BoJ affirms its QQE purchases and could revise down the FY15 CPI forecasts; expect demand for the borderline negative yielding 2y JGB auction to be strong amid heavy support from BoJ. In Australia, we look towards RBA Stevens’ speech where we expect him to continue talking down the AUD while firming his accommodative monetary stance, constructive for the ACGB auctions even as AUD treads toward 0.76/USD.

¨    AxJ Markets: Singapore will reopen the SGS 0.5 04/18 in its inaugural mini auction where we expect firm demand given its smaller size (SGD1bn) and fair valuation; USDSGD to driven by USD where we recommend for investors to add in small clips on dips. In Thailand, the approval of the constitutional draft may further the political divide and delay the economy’s recovery, hence we see a higher likelihood of a 25bps BoT rate cut; expect USDTHB to drift towards the upper bound of the 32.3-33.0 range while speculation of rate cut should remain constructive for ThaiGBs. Meanwhile, risk aversion in the Chinese space following the spate of defaults could continue to buoy demand for CGBs at current levels while softer economic data out of Korea from IP and exports may result in firmer demand for KTBs as talks on a BoK rate cut resurfaces. Elsewhere, Indonesia and India are expected to exhibit a quiet week, where the IDR continues to experience weakening pressures stemming from a stronger USD amid bouts of risk aversion while RBI would likely remain diligent in stabilizing the currency. Elsewhere, investors are likely to digest Zeti’s comments that the weak MYR is unlikely to influence monetary policy while the stable growth could reinforce BNM’s neutral stance, supporting strength in MYR.    

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¨            Selected Trade Reviews:

¨    Trade Idea: Long 20y JGB (Current: 1.059%; Entry: 1.045%; Stop Loss: 1.400%; Target: 0.850%)

¨            BoJ’s QQE purchases continue to outweigh fresh supply from MoF; 20y JGB to outperform the curve given its attractive pickup against our fair value estimates.

¨    Trade Idea: Short EURGBP (Current: 0.7191; Entry: 0.7133; Stop Loss: 0.7400; Target: 0.6860)

¨            Investors continue to price in larger downside EUR risks given fundamental weakness and a protracted recovery path.

¨    Trade Idea: Long USDKRW (Current: 1082.3; Entry : 1083.5; Stop Loss: 1010.0; Target: 1180.0)

¨            Diverging growth and monetary policy outlooks between US and Korea to be the main driver, driving the USDKRW pair higher towards our target of 1180.

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¨            Weekly Positioning

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¨	¨                  Rates	¨                  FX
¨                  Overweight	¨	¨
¨                  Mild Overweight	¨                  GILT, P. EGB, ACGB, CGB, ThaiGB, IndoGB, GSec	¨                  USD, INR
¨                  Neutral	¨                  UST, C. EGB, SGS, KTB, MGS	¨                  GBP, SGD, HKD, KRW, CNY, MYR, THB
¨                  Mild Underweight	¨                  RPGB,	¨                  JPY, PHP, IDR
¨                  Underweight	¨                  JGB, HKGB	¨                  EUR, AUD