RHB FIC Rates & FX Market Weekly - 5/6/15

5 June 2015

Rates & FX Market Weekly

Improving US Data to Buoy USD; Heavy Municipal Bond Issuance in China to Fuel Cautious Sentiment; BoK & BoT to Hold Rates

Highlights

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¨    Global Markets: The improving US retail sales and consumer confidence data releases are expected to buoy a modest appreciation in USD while the 10y and 30y UST auction will be better supported relative to the 3y as the shorter-end remains more vulnerable to sentiment shifts and surprise upsides to US data. In UK, slower Industrial production data is expected pressure GBP lower. Over in EU, risk from Grexit is likely to be contained despite delay to the EUR300m loan repayment to the IMF; short squeeze in EURUSD is likely to eye 1.15, with Bund selloff being the major driver. Turning to Japan, the USDJPY pair is likely to remain stalled at 125, as expectations for the stronger 1Q GDP final print is likely to echo BoJ’s Kuroda optimism, dampening some hopes for further BoJ easing. Demand for the new 20y JGB is likely to be softer than average despite higher yields as Japan continues to increase the bond issuances on the longer end. In Australia, weak unemployment data is expected to remain supportive of RBA’s dovish tilt, containing some of the ACGB weakness, while the AUDUSD pair should trade closer to our trade target of 0.753, with bearish pressures stoked by the weaker trade balance. Meanwhile, Glenn Stevens’ speech may shed clues on RBA’s monetary policy direction.

¨    AxJ Markets: In China, heavy economic data releases alongside the 5 municipals bond auctions totaling CNY159.4bn is likely to keep investors cautious, supporting strong demand for 3y CGB while longer tenors underperform the curve; expect CNY to continue taking cues from the PBoC fixings. Meanwhile, we opine for BoK to hold out on a rate cut next week amid the elevated household debt where we expect KRW to take directional cues from JPY, as BoK keeps a keen eye on the JPYKRW pair. Over in Thailand, while BoT could ease as early as next week, we do not discount the likelihood of it occurring over 3Q to allow the impact from the 2 previous rate cuts to filter through the economy and improve import demand; maintain mild overweight on ThaiGBs with a view for a mildly steeper curve, as BoT is unlikely to lower rates below the 1.25% low; USDTHB to continue its climb to 34.0. In Malaysia, investors remain watchful of 1MDB and rating developments which could continue to weigh on MYR. In India, expect USDINR to trend higher towards 64.509 as markets continue to digest RBI’s rate cut decision while keeping an eye on expectations of modest improvement in the current account deficit which should lend some support to GoISecs. Meanwhile, global developments are likely to impact the IDR on bouts of risk aversion where we may see the USDIDR pair trading closer towards 13,300 levels alongside tepid response for the upcoming 5y and 15y IndoGB. Elsewhere, the quiet economic calendar in developed AxJ could continue to see SGS and HKGBs take cues from the safe haven global bonds, while USDSGD could continue to trend modestly higher, driven by USD appreciation.    

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¨            Selected Trade Reviews:

¨    Trade Idea: Long 10y KTB vs 10y UST (Current: 16bps; Entry: 54bps; Stop Loss: 100bps; Target: 10bps)

¨            Recommend to take profit on this position at <20bps spreads.

¨    Trade Idea: Short AUDSGD (Current: 1.0370; Entry: 1.1286; Stoploss: 1.1544; Target: 1.0100)

¨            Fundamental weakness in Australian economy could compel RBA to remain accommodative, evoking further bearish pressures on AUD.

¨    Trade Idea: Short SGDMYR (Closed: 2.7509 (4 Jun); Entry: 2.6912 (23 Apr); Total Geometric Return: -1.86%)

¨            Seek to revisit position over the short to medium term as any potential Fitch downgrade is likely to be priced in.

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¨            Weekly Positioning

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

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