RHB FIC Rates & FX Market Update - 24/6/15

24 June 2015

Rates & FX Market Update

Risk Appetite Continued to Improve on Greek Prospects; Foreign Participation in 2y UST Auction Highest Since February 2010

Highlights

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¨    Risk appetite continued to improve overnight, pressuring UST and Gilt yields higher while core-peripheral EGB spreads narrowed as investors remained optimistic over Greek debt talks; Greek officials are expected to meet with the IMF and Euro creditors later tonight where we continue to reserve our optimism on a successful deal given the political hurdles Tsipras must overcome amid a recession hit economy. Meanwhile, a rise in US new home sales (May: 546k) and hawkish remarks from Fed’s Powell (FOMC voting member) saw the USD surge against most major crosses and overshadowing the disappointing PMI manufacturing data. This was followed by a successful reopening of the 2y UST auction (USD26bn) which garnered firm demand albeit lower than previous auction (BTC: 3.28x vs 3.40x) with an average yield of 0.692% while indirect bidders mopped up 52.6% of the note, suggesting highest foreign participation since February 2010.

¨    Over in Asia, the preliminary manufacturing PMI print (June: 49.6) in China came in higher than expected, suggesting hints of stability in the Chinese economy, but we maintain that the PBoC is likely to remain accommodative to support the pace of the economic recovery; maintain mild overweight CGBs. Elsewhere, the KRW was the worst performer against the USD, in the Asian region, stemming from the dampened sentiment over the MERS outbreak. This was reiterated by BoK governor, Lee who stated that the outbreak was the biggest risk to the economy which adds the element of uncertainty to its economic forecasts. 

¨    The EURUSD took a hit last night despite positive developments in Greek debt negotiations following Fed’s Powell’s remarks of possible rate hikes in September and December. We expect near-term volatility to remain in the pair on the back of uncertainty stemming from a firm Greek resolution and a fuzzy policy guidance given by the Fed.

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