RHB FIC Rates & FX Market Update - 13/05/15

13 May 2015

Rates & FX Market Update

Higher UST Yields Drew Strong Interest Towards its 3y New Issuance; Higher ACGB and ThaiGB Supply Expected in FY16

Highlights

¨   Yields on 10y UST touched an intraday high of 2.36% before retracing towards 2.25% as investors saw better value in lieu of a delay in Fed lift-off, echoed by the strong demand at the new 3y UST issuance (May: 3.29x, 1.00%; April: 3.25x, 0.865%). We opine for the strong demand to follow through to the upcoming 10y and 30y UST auctions this week. Meanwhile, we prefer to hedge against downside risks from the unrelenting Greek woes while bearing in mind the aggressive steepening among EUR sovereigns over the last couple of weeks driven largely by technicals rather than fundamental changes where consensus expects a stronger CPI and GDP print; maintain neutral to mild overweight EUR rates. Turning to UK, the GBP climbed to 1.5674/USD, supported by stronger IP prints. We expect BoE’s inflation report due today to signal weaker growth and inflation forecasts where alongside a delay in rate normalisation cycle may further clip optimism.

¨   Although the Australian FY15 budget deficit beat initial forecasts at AUD35.1bn, investors were focused on the oncoming fiscal woes. Net debt is expected to climb to 17.3% of GDP in FY15/16 (+1.7% y-o-y) alongside a duration extension bias (net bond issuance of AUD38.2bn; gross: AUD72bn (+8bn y-o-y)). Elsewhere, Thailand’s FY16 final budget draft signals a +5.6% expansion to THB2.72trn and a 56.0% y-o-y increase in its fiscal deficit (THB390bn) to maintain the current pace of investment budget (20.0% of GDP) amid softer revenue growth. ThaiGB yields added 2-13bps on concerns over FY16’s potential higher net bond supply given a year of lower refinancing needs (THB232.9bn; -8.5% y-o-y); given the thin ThaiGB liquidity, we prefer to remain on the sidelines in the near term.

¨   Reform setbacks have begun to overshadow earlier optimism, where the pullback of harsh MAT tax imposition failed to buoy the INR; USDINR threatened its 1y high of 64.3 yesterday. Forecasts signaling higher demand for oil consumption may fuel the resurgence of inflation risks, raising RBI rate cut prospects and dampening INR’s allure.