RHB FIC Rates & FX Market Update - 27/8/15

27 August 2015

Rates & FX Market Update

Investors Welcomed Dudley’s Dovish Comments; ECB Not Ruling Out Further QE; Singapore Faces Technical Recession Fears

Highlights

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¨    Investors welcomed William Dudley’s (vice-chairman, dove) dovish take on Fed’s near term rate trajectory, where he highlighted a low chance of Fed liftoff in September 2015 due to external uncertainty but expressed hope of policy tightening moves this year. US durable goods data surprised on the upside due to a slower decline in aircraft orders; demand for safer assets eased, resulting a second session of bear steepening USTs (+7 to 10bps across). UST auctions further reflected the weakness where demand at the 5y UST auction was the weakest since July 2009 (YTM: 1.463%; BTC: 2.34x). In Europe, ECB chief economist and executive board member Peter Praet warned of Europe missing its inflation target amid elevated downside risks from global growth concerns and slump in commodity prices. He added that ECB will not hesitate to step up QE if necessary; EUR was down c.2% vs USD overnight, remain mildly bearish EUR over medium term but tactically neutral.

¨    Asian remained relatively muted versus volatile shifts in the developed markets, largely on domestic support while Asian FX remains vulnerable in the light of further revaluation moves. South Korea announced a consumption tax cut for the remainder of 2015 to lift growth, but persistently high household debt levels may limit its effectiveness; stay mild underweight KTBs on lingering weak sentiment. In Singapore, IP further affirmed the slowdown in Singapore (July: -6.1% y-o-y), the 6^th consecutive month of decline. This bolstered fears of a technical recession in Singapore and in turn, further monetary easing from MAS; stay neutral to mildly bearish SGD.

¨    USDIDR climbed past 14,100 on the back of a stronger USD. We remain bearish on IDR over the near to medium term given BI’s likely limited recourse amid weaker sentiment, its dependency on commodity exports, topped off with a weak external safeguard. Accumulated reserves are sufficient to sustain c.5 months of FX intervention at a slow to moderate pace, assuming a floor of 6 months import coverage.