RHB FIC Rates & FX Market Update - 30/7/15

30 July 2015

Rates & FX Market Update

US Rate Hike Remains Data Dependent Without Confirmation of a Rate Hike in September; BoK to Discuss Alternative to Rigid CPI Target

Highlights

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¨    The FOMC statement released overnight continued to indicate that a FFR hike remains data-dependent but did not provide any signs of a firm rate hike in September. The committee’s assessment of the US economy remains optimistic where they steered attention to the diminishing underutilization of resources and added their preference to see “some further improvements” in labour data. Fed further removed reference to energy prices despite the recent weakness, suggesting that US’ inflation trend remains well within their purview for now. The initial selling of the USD earlier in the session saw investors adding USD exposure opportunistically given that a rate hike remains on the cards; stay long USD/Asia. We look ahead to US 2Q15 GDP due later today, with Bloomberg estimates signaling 2.5% q-o-q ann. versus -0.2% prior. Meanwhile, JPY weakened despite the strong rebound in Japan’s June IP which added on to optimism from the expansionary manufacturing PMI released earlier; maintain mildly bearish view on JPY. In UK, mortgage approvals rebounded to 66.6k in June (May: 64.8k) following the better 2Q15 GDP print; maintain our tactical long GBPUSD call on hawkish BoE expectations and improving fundamentals.

¨    Over in S.Korea, BoK minutes revealed discussions of a possible alternative gauge to the rigid triennial CPI target which could be a positive development. That aside, the likelihood for another 25bps BoK rate cut fuelled by concerns of the slowing exports and domestic consumption remains relevant, supporting further KRW weakness. Elsewhere, Thai Finance Minister commented on the low efficacy of further BoT rate cuts, emphasizing their dependence and priority on public investment spending to underscore growth in 4Q15; THB to weaken.

¨    EUR fell below 1.10/USD amid strong two-way activity. The close below its 100day MA (1.1017) opens up further downside EUR pressure. Our longer term EUR outlook remains bearish on the divergent policy outlook. Over a shorter horizon, we expect an upbeat US GDP print to drive further FFR hike speculations for September, strengthening the USD.