RHB FIC Rates & FX Market Update - 25/8/15

25 August 2015

Rates & FX Market Update

FFR Hike Trajectory Increasingly Delayed Towards 2016 Amid Global Rout: Higher Likelihood of SGD NEER Easing Given Weak CPI

Highlights

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¨    China’s decision to refrain from additional easing over the weekend proved to be costly as global risk assets continued to sell off sharply. 10y USTs remained sticky around the 2% level, although the UST curve bull steepen as front-end USTs gained amid investors’ paring back September’s FFR hike expectations; futures contracts indicated a 24% probability of lift-off in September, compared to c.50% a week ago. Fed’s Lockhart maintained his preference for a lift-off this year, but CNY’s devaluation and the declining oil price could further complicate Fed’s decision outlook; balance of risk for Fed to embark on policy normalization remains increasingly titled towards 2016.

¨    Singapore’s CPI fell 0.4% y-o-y, marking the 9^th straight month of downtrend but core inflation remained in positive territory. Authorities expected price pressures to remain subdued for the rest of the year, which challenges the current SGD NEER mild appreciation stance amid the global rout; remain neutral to mildly bearish SGD and underweight short dated SGD rates. INR surged past 66/USD, prompting RBI governor Rajan to emphasize upon India’s strong fundamentals and FX reserves (c.USD380bn, c.9 months import coverage) in an attempt to calm the markets and curb excessive volatility via potential intervention. He also hinted that further monetary easing remains on the table if inflation remained favourable. We remain neutral on USDINR and recommend mild overweight short-end GSecs.

¨    EURUSD tested briefly a high of c.1.17. Large unwinding of EUR shorts and related hedges supported the EUR’s spike higher. We see ‘EUR-haven’ demand as a short term phenomenon exaggerated by chunky order sizes. Stay tactically neutral on EUR amid heightened volatility but eye a re-visit on EUR shorts amid better stability given the fundamental play from diverging growth and policy outlook.