RHB FIC Rates & FX Market Update - 23/7/15

23 July 2015

Rates & FX Market Update

UST Bear Flattened on Improving US Data; Japan to Delay Achieving FY20 Balanced Budget; Further KRW Weakness Expected

Highlights

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¨    UST bear flattened overnight as oil prices continued to press lower on top of strong US data releases where existing homes sales grew at the strongest pace in 8 years, receding expectations for a later FFR liftoff. Cognisant of lingering external headwinds from Greece and China, we expect July 28-29’s FOMC focus to provide further insights on the plausibility of September FFR hike which could result in a knee-jerk UST flattener; markets are currently pricing in a c.30% of a September hike. In UK, BoE minutes saw the committee increasingly tilted towards a rate hike but remains split on the timing where we opine BoE to trail FFR’s hike.

¨    Elsewhere, MoF shared that the Japanese government is unlikely to achieve its target of a balanced budget by FY20, citing greater priority needed to boost economic growth over the medium term. Additionally, the government’s CPI forecast also fell short of BoJ’s 2% target by FY16, at only 1.6%. We maintain expectations for USDJPY to face further upward pressure through 2015 on diverging growth and policy outlooks.

¨    South Korea’s weak 2Q GDP print printed within general expectations, taking into account the impact from MERS outbreak which compounded on the weak domestic economy and exports. We expect further KRW weakness over the near term, particularly against a strengthening USD. Elsewhere, Thai’s deputy PM kept its 1.2% export growth forecast on review, but remain optimistic on a recovery boosted by the weakening THB as it continued to climb higher overnight to 2009 levels, at 34.7/USD. 

¨    AUDUSD fell to a 6y low of 0.7381, pressured by softer than expected CPI alongside a further plunge in commodity prices. RBA views further depreciation pressures on the AUD as appropriate, while keeping its options open towards further easing. We maintain a mildly bearish view on AUD, with a preference to add short AUD on any pullback towards 0.75/USD.

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