RHB FIC Rates & FX Market Update - 10/7/15

10 July 2015

Rates & FX Market Update

Promising Compromise between Greece and its Creditors Supported Easing Risk Aversion; BoE, BoK and BNM Remains Status Quo  

Highlights

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¨    The UST curve bear steepened yesterday following hopeful Greek developments; PM Tsipras pulled together a new reform proposal which mirrored the previous proposals suggested by the EU creditors. The easing risk aversion overnight was also supported by IMF’s assurance of the low likelihood for Greek debt woes and Chinese stock market rout to impact global growth, while investors eye Yellen’s speech today which could provide a clearer direction on the path of rate hike. Else, BoE maintained status quo with no fresh insights; the GBP was little changed at 1.53/USD. The budget released earlier remains the crux of investor‘s concerns over risks of an overly aggressive consolidation plan amid the modest recovery. Separately, AUD modestly rose as Australia’s unemployment rate fell to 6.0% in June, beating consensus’ 6.1% where participation rate also improved 0.1% to 64.8%.

¨    Turning to Asia, Malaysia’s central bank maintained OPR at 3.25%, in line investors’ expectations. BNM’s statement however highlighted downside risks amid elevated market volatility and weak external conditions. Although CPI is expected to trend up over 2H15, RHBRI expects headline inflation for FY15 at 2.3%, still lower than FY14’s 3.2%. While our base case remains for BNM to maintain status quo for the rest of the year, consideration for a rate change could stem from sharper downside risks to growth. Similarly, BoK kept its benchmark rate at 1.50%, where we expect short-end KTBs to remain constructive amid negative effects on MERS to the economy as well as expectations for the supplementary budget to raise a sizable bond supply.

¨    We expect the BoK to maintain its dovish tilt and further pre-emptive action to cushion further downside impact from the MERS outbreak on its sluggish economic recovery. Easing monetary and fiscal plans remains supportive of our mildly bearish view on KRW towards our YE15 target at 1,140/USD, further underpinned by the modestly appreciating USD.