FW: RHB FIC Rates & FX Market Update - 13/7/15

RHB FIC Rates & FX Market Update - 13/7/15

13 July 2015

Rates & FX Market Update

Greece’s 72 Hour Deadline to Keep Investors Cautious; Yellen Suggest that The Fed’s Rate Hike Remains on Track for 2015

Highlights

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¨    The Greek government was handed a new 72 hour deadline to pass the reforms before Thursday’s EU meeting. Ongoing risk aversion is likely to widen Core-Peripheral spreads further as uncertainty over Greece’s EU membership looms but we expect the EUR to range trade between 1.09/12 ahead of Wednesday’s deadline. As highlighted in our previous publications, the 20 July deadline to the ECB remains crucial for Greece where we expect ECB to maintain the ELA ceiling through to 15 July as a result. At this juncture, Greek’s binary fate remains balanced where a non-Grexit scenario would result in long term capital controls versus a Grexit which would require material changes in the face of a new currency.

¨    UST recorded further losses last Friday as brief optimism from Greece’s bailout proposal and Yellen’s outlook discussion suggested that an initial rate lift-off remains on track for 2015. More importantly, we eye her semi-annual testimony to the Congress which may result in a dovish outturn following recent developments, capping any long end UST yield increments. In Asia, Malaysia’s IP surprised on the upside, expanding by 4.5% y-o-y in May (April: 4.0%), supported by a stronger mining output which helped to offset the slower manufacturing growth following the implementation of the GST in April; USDMYR retraced below its 3.80 support. Elsewhere, CGBs traded on a softer note ahead of the trade data release due later today, where a marginal rebound in exports is unlikely to buoy sentiment in the Chinese market; maintain overweight bias on short dated CGBs.

¨    USDJPY backed up above the 122 handle, as optimism from a likely compromise between both the Greek and EU leaders spurred investors to partially unwind safe haven bets. We expect the USDJPY pair to remain dominated by Greek concession talks where a continued risk-off environment should prolong the short term upside luster of JPY; YE15 target however remains unchanged at 125/USD.