RHB FIC Rates & FX Market Weekly - 19/6/15

19 June 2015

Rates & FX Market Weekly

US Fundamentals to Dictate Global Govie Directionality; Risk Aversion to be Fuelled by Greek Impasse

Highlights

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¨    Global Markets:  Markets will look to find hints of further economic rebound and look past the Fed’s downward revision in growth forecasts for 2015, which was initially dragged down by a slower 1Q15, with a slew of US data due; PMIs are expected to broadly improve in June, alongside higher home sales in May, which will support the USD and weigh on UST demand. Separately, Eurozone leaders will hold a special summit on Monday, to address Greece’s situation given the absence of a bailout deal last Thursday; worries could partly reflect waning consumer confidence print due on Monday, as we maintain a mildly bearish view on the EUR over the near-term. Meanwhile, focus in Japan will be on the draft budget due to be released early next week where we continue to eye Prime Minister Abe's fiscal consolidation targets, particularly on revenue generation as the modest economic recovery constrains any credible spending cuts. Nonetheless, the USDJPY pair to be driven by USD in the week ahead, as data releases out of US continue to build onto expectations for Fed's rate liftoff. A quiet calendar week in Australia next week where we expect ACGB yields to take directional cues from developments in the US following a dovish FOMC meeting; expect the AUDUSD to trade in the 0.77-0.785 range while a less hawkish FOMC is likely to be supportive of the upcoming 4y ACGB auction. 

¨    AxJ Markets: The 5y SGS new issuance next Friday is likely to garner strong demand from domestic investors given attractive rolldown in the belly of the SGS curve; SGS to continue taking cues from USTs next week. Turning to Hong Kong, we expect pan-democracy supporters to continue calling for universal suffrage after rejecting the China-backed bill, which is likely to be a near term non-mover on HKGBs and HKD, but could weigh on Hong Kong growth and fundamentals over the medium term. Meanwhile, a fairly quiet economic calendar in Korea could divert investors’ attention towards the newly appointed Premier alongside further affirmation by BoK to maintain the accommodative stance for a prolonged period to cushion the negative impact of MERS on growth; demand for 20y KTB auctions next week could remain soft, as the weak domestic sentiment alongside negative impact from MERS weighs on the allure of KTBs as a safe haven play. Over in the Malaysia, BNM is expected to auction the 5y GII (re-opening), where we expect demand to be supported by institutional and index-tracking bidders. In addition, the central bank’s efforts to contain the MYR volatility may partly reflect a lower foreign reserves as at 15-June. Over in Thailand, we look towards customs trade balance figures where we expect the deficit to narrow marginally but is unlikely to offer any long term respite on the THB moving forward. Nevertheless, expectations for stronger US data may ultimately see the USDTHB pair trade higher towards the 33.772 near term resistance level. Expect a quiet calendar week in both Indonesia and India where we expect the reprieve in the IDR and INR against the USD to be short lived on expectations of stronger US data next week. Notably, investor sentiment in India is expected to be boosted by Modi’s efforts to curb inflation following his decision to cap prices on agricultural products which may see additional interest rate cuts by RBI.

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¨            Selected Trade Reviews:

¨      Trade Idea: 3/10y KTB (off-Benchmark) Steepener (Current: 66bps; Entry: 44bps; Stop Loss: 10bps; Target: 90bps)

¨            Mers outbreak to weigh on economic recovery

¨      Trade Idea: Tactical Long USDMYR (Entry: 3.7080; Stop Loss: 3.6576 ; Target: 3.7786))

¨            Temporary respite opened up opportunities ahead of Fitch’s sovereign rating review

¨      Trade Idea: Short AUDUSD (Current: 0.7790; Entry: 0.7809; Stop Loss: 0.8158; Target: 0.7530)

¨            Policy divergence remains key fundamental driver for AUD

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¨            Weekly Positioning

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¨	¨                  Rates	¨                  FX
¨                  Overweight	¨	¨
¨                  Mild Overweight	¨                  P. EGB, ACGB, KTB, CGB, MGS, ThaiGB,  GolSec	¨                  USD
¨                  Neutral	¨                  UST, GILT, C.EGB, IndoGB	¨                  GBP, HKD, MYR, INR
¨                  Mild Underweight	¨                  RPGB, SGS	¨                  EUR, AUD, JPY, SGD, CNY, PHP, THB, IDR
¨                  Underweight	¨                  JGB, HKGB	¨                  KRW