FW: RHB FIC Rates & FX Market Update - 18/06/15

18 June 2015

Rates & FX Market Update

Fed Signaled Flatter Policy Path Amid Weaker Growth and Unemployment Forecasts; GBP Extended Gains on Wage Growth

Highlights

¨   FOMC minutes highlighted a flatter policy path with Fed’s dotplot showing a downward shift; 7 of 10 members are expecting either a 25bps hike or no change in 2015. Fed projections also highlighted downgrades to growth and unemployment rates for 2015 to 1.8-2.0% and 5.2-5.3% respectively; yields on short to belly USTs declined. We maintain neutral UST duration given increasing risks to an upward UST curve shift amid relatively low term premiums. Although US CPI data due later today is likely to print higher, we opine comfort with a later FFR hike towards December given low risk of overshooting inflation, albeit constrained by market technicalities. BoE minutes contained little surprises but the pick-up in wage growth led to gains from GILTs and the GBP. We expect fiscal consolidation efforts and EU referendum to raise the bar for a BoE hike in the coming months.

¨   In Asia, MGS outperformed regional peers where offshore investors who sidelined ahead of FOMC returned to capitalize on the cheaper valuations, albeit skewed towards the short end given Fitch’s looming decision which is unlikely to result in medium term negatives. In Indonesia, long dated IndoGBs rose while the IDR was little changed ahead of BI’s meeting today with no change expected given renewed inflationary pressures alongside weak growth prints. Elsewhere, Moody’s stated that the MERs outbreak is credit negative on Korea’s sovereign rating which may weigh on an already weak consumer market. This may diminish the allure of KTBs as a safe haven play among Emerging Asia; KTB yields were up 3-5bps overnight.

¨   GBPUSD extended gains above its 200day MA and its 1.5785 resistance following the uptick in wage growth. The 50/100-day MA convergence suggests for further bullish momentum but we expect the recent reprieve to be short lived on expectations the BoE is to delay its rate liftoff amid lack luster employment data; maintain neutral stance.