RHB FIC Rates & FX Market Update - 11/5/15

11 May 2015

Rates & FX Market Update

Real Money Returns to Chase the UST Carry Trade; Medium Term Downside Risks to GBP; PBoC Cuts Rates for the Third Time

Highlights

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¨    USTs closed positive on Friday, with strong real money demand at the belly (5y: -7bps) on carry trades moves. This followed a modestly strong NFP print in April at 223k and an improvement in unemployment rate to 5.4% (-0.1%) but data continues to dampen any near term FFR hike prospects; USD gained against major crosses except GBP. In Europe, core and peripheral EGBs trimmed earlier losses; 10y yields fell 4-12bps across the region on the weaker than expected German IP print which dampened inflationary and economic growth expectations.

¨    In China, PBoC responded to the weaker than expected manufacturing PMIs and export growth by reducing the lending and deposit rate by 25bps each to 5.10% and 2.50% respectively on top of lifting the deposit rate ceiling from 1.3x to 1.5x of benchmark rate where the latter may signal a preamble to quicker capital account liberalization. We maintain our view for a further 25bps cut in key rates alongside further RRR cuts of 50-100bps given increasing downside risks to growth. While PBoC has confirmed China’s lack of need for QE policies, we continue to expect the government to introduce fiscal friendly policies to regulate issuance demand; maintain mild overweight. Aside, IMF revised Thai’s 2015 GDP forecast higher to 3.70% (+0.20%), supported by the rebound in consumption from lower fuel prices and private investments but cautioned that risks to outlooks remains tilted to the downside amid possible policy slippages and political uncertainty; maintain mild overweight on ThaiGBs as the modest recovery may compel BoT for another rate cut.  Else in developed AxJ, yields edged lower alongside global market, with yields on 10y treading lower by 7-13bps on Friday. 

¨    GBP appreciated following the most favourable outcome with a Conservative Party victory, avoiding a hung Parliament. We opine the relatively tighter fiscal policy to suggest a prolonged rate normalisation cycle; BoE to hold rates tomorrow. Uncertainty from the EU 2017 referendum could heighten medium term downside risks.

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