RHB FIC Rates & FX Market Update - 6/7/15

6 July 2015

Rates & FX Market Update

Greek’s Rejected Referendum Shifts Grexit to a Base Case Scenario; Investors to Reassess EMU Stability; AUD & MYR Broke Key Supports

Highlights

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¨    Strong gains across EGBs even as the Greeks head to referendum polls over the weekend which resulted in over 61% “No” votes, touted to locals as a vote on terms of any bailout agreement rather than a vote on euro membership. This thus shifts the likelihood of a Grexit towards a base-case scenario where we expect investors to begin reassessing the stability of the EMU, suggesting heightened downside risks to the EUR; we eye opportunities to add to plausible short EURUSD spot below its resistance at 1.1079/USD. Preoccupation with Greek woes sidelined improving PMI releases where the composite rose 0.1pts to a 4-year high, driven by manufacturing and developed European economies. Over in Japan, impact from the stronger PMI were marginal, JGBs and JPY continued to post modest gains amid safe haven flows.

¨    MYRUSD hits a 10-year low this morning, sliding past its previous 3.80 peg, weighed by a continuous decline in both exports and imports in May and political noise surrounding the country. A lack of timely central bank intervention may risk further weakening on the MYR as oil prices soften further amid rising Greek uncertainty. On the contrary, the MGS market remained relatively stable following Fitch’s A-/stable affirmation last week. Meanwhile, India looks to implement the cash transfer of food subsidy in September, relieving c.10-15% of its annual outlay on food subsidies from its fiscal budget. Additionally, India may introduce a 100g limit on gold deposits which is positive for its CAD, and in turn supportive for the INR towards our YE15 target of 64.2/USD. 

¨    AUD touched a low of 74.52c/USD, breaking through its 75.2c support, driven by the risk-off sentiment. Medium term negatives including soft commodity prices, weaker terms of trade and increased risk aversion is likely to keep the AUD soft, in line with RBA’s preference. Further declines in AUD could allow RBA to hold back further rate cuts; expect RBA to maintain status quo at Tuesday’s meeting.

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