RHB FIC Rates & FX Market Update - 27/7/15

27 July 2015

Rates & FX Market Update

Fed To Maintain Stance On Upcoming FOMC; Europe’s Outlook Remains Weak and Uncertain

Highlights

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¨    Against expectations for an improvement, the surprising 6.8% fall in US New Homes Sales last Friday supported small gains on USTs ahead of FOMC meeting. Nonetheless, this data is unlikely to materially influence the Fed’s statement, given broader gains in the housing market, where we expect Yellen’s tightening bias to remain going into the FOMC meeting this Wednesday. EU Flash PMIs indicated softening growth in the economy with the Greek saga impacting confidence levels. The Troika reconvenes for further technical negotiations following an agreement between Greece and its creditors; capital controls broadly remain and are unlikely to be lifted over the next few months. We look for further EUR weaknesses against majors on the Greece’s long drawn resolution amid the declining economic momentum. S&P reaffirmed Australia’s AAA-rating, but threatened a downgrade if the budget continues to deteriorate; impact on ACGBs is expected to be limited but Australia’s tough economic situation currently means that budget surpluses remain out-of-reach without compromising growth.

¨    Concerns on China’s growth remain following the weak flash PMI of 48.2,; supporting gains on CGBs. Meanwhile, the Chinese state council indicated its plans to expand the CNY band further from its current 2%, which is likely to support its inclusion to the IMF SDR basket. In Singapore, IP in June underwhelmed expectations, declining by 4.4% y-o-y, weighed by key sectors such as electronics and pharmaceuticals; USDSGD reversed earlier losses, remaining below 1.37/USD where we opine for MAS to maintain their SGD NEER framework in October.

¨    Japan’s manufacturing PMI indicated uptrend in activity which supported modest gains on JPY to 123.79/USD. Prime Minister Abe has been losing support due to the population’s disdain against any revisions to Japan’s pacifist constitution; negative for Abenomics and Japanese assets. We maintain our mildly bearish call, expecting the stronger USD to drive the pair higher towards our target of 126/USD.