RHB FIC Rates & FX Market Update - 3/8/15

3 August 2015

Rates & FX Market Update

Weak US Wage Growth Added Uncertainty FFR Liftoff; 10Y UST Fell to 2.18%; Declining S.Korea and Thailand Exports Support Easing Bias

Highlights

¨                   

¨    10y UST broke its short term support to 2.18% last Friday, marking the third consecutive week of positive returns and marking a strong UST performance in July. Friday’s risk aversion was fuelled by added uncertainty to Fed’s rate hike trajectory, stemming from (i) the weak wage growth, (ii) soft University of Michigan print and (iii) another 3% decline in Brent oil prices. We view these as a minor setback to Fed’s dual mandate; market data has aligned to our expectations for a 4Q15 hike, with the probability of a September rate hike easing to 38%. Flash EU inflation printed +0.2% y-o-y, unchanged from prior, although a stronger core print and declining oil prices point to further downsides in CPI. We expect the Greek woes ahead of the 20 Aug ECB repayment deadline and the continued monetary policy accommodative to weigh on the EUR.

¨    In Asia, the soft Chinese PMI (50.0 vs 50.2 prior) was unable to allay earlier concerns. China’s Politburo has promised to increase “targeted” adjustments to lift its economy, citing “pro-active” fiscal policy and “appropriate” liquidity. We remain poised for another round of fiscal stimulus which should benefit short dated CGBs. Other pertinent data included declining trade balances and exports from S.Korea and Thailand. Thai exports recorded its largest decline in 3 years where we expect the weak Thai trade data exacerbates further downside risks to THB; BoT to retain easing rhetoric on Wednesday, maintain mild overweight on short dated ThaiGBs. We also begin to see technical signs of exhaustion in the USDKRW rally; BoK’s easing bias to keep the pair elevated above its 1160 support level. 

¨    We are ‘neutral to mildly bearish’ on USDJPY, expecting the pair to remain range-bound (122.5-125.0)  in the near term, amid speculations over a new BoJ CPI gauge which may ease expectations for further BoJ accommodation. A rising USD and FFR hike suggests upside risks to USDJPY over the medium term where we opine bouts of safe haven demand unable to fully offset the medium term upside pressure.

¨             

¨             

¨             

¨