FW: RHB FIC Rates & FX Market Update - 25/5/15

RHB FIC Rates & FX Market Update - 25/5/15

25 May 2015

Rates & FX Market Update

Belly USTs Dipped on Hawkish Yellen; Haldane Sees Interest Rates Rising Incredibly Gradual 

Highlights

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¨    Short to belly USTs underperformed on Friday after seemingly hawkish comments from Yellen and a pickup in US inflation, where the former expects an initial tightening to occur this year should the economy meet her forecasts, with a gradual pace of hikes to follow; we maintain neutral duration on USTs. By contrast, long end Gilts outperformed the curve as BoE chief economist, Haldane, suggested that the trajectory of interest rate rise would be ‘incredibly’ gradual with a rate peak at 3-4%. As such, we remain neutral duration on Gilts, where we expect the pushback in interest rate hike expectations on subdued inflation to support govies in the near term; the GBP and EUR were significantly weaker against the stronger USD with the latter dipping below the 1.1 psychological level. P.EGBs underperformed regional peers with concerns over Greece’s capacity to meet obligations turning constructive for core govies. We opine Greek officials are likely to come to a quick compromise, with Greece cautioning that it has insufficient funds to meet next week’s IMF repayment; remain modestly overweight on P.EGBs, supported by ECB’s PSPP.

¨    In Asia, USD strength weighed on the JPY on Friday while we expect any reprieve offered by the better than expected Japan trade deficit print to be momentary; we maintain a mildly bearish view on the JPY and expect the currency to trend closer to 125/USD. In Thailand, expect bearish pressures to persist ahead of slower exports growth expectations in April, in addition to Thailand’s political plight and BoT’s dovish stance; THB fell 0.32% to 33.526 overnight. Turning to India, GolSecs posted small gains as Finance Minister Jaitley urged for RBI to cut rates amid the stabilizing CPI ahead of next week’s RBI meeting.

¨    GBPUSD broke below its 200-day MA (1.5573) attributed to the stronger USD following Yellen’s hawkish comments. Despite stronger retail sales in the UK, we expect subdued inflationary pressures to intensify expectations of a delay to BoE’s rate hike cycle. Haldane’s comments are also likely to weigh on the GBP in the near term.

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