RHB FIC Rates & FX Market Update - 4/8/15

4 August 2015

Rates & FX Market Update

Brent Oil Below USD50/bbl Dampens Inflation Outlook; S&P Revises EU Outlook to Negative; Deep Contraction in Chinese Caixin PMI

Highlights

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¨    The UST curve bull flattened as the protracted decline of Brent oil prices below USD50bbl dampened the inflation outlook on top of a soft ISM manufacturing print; yields on USTs >5y fell 1 to 5bps. In Europe, EGBs were relatively flat overnight despite the stronger manufacturing PMIs, with the exception of SPGBs. Yields on 10y SPGB edged higher by 10bps to 1.94%, due to renewed political risk in Spain spurred by Catalan leaders calling for early elections in September. We however expect sentiment in the region to remain jittery following S&P’s decision to downgrade the outlook for EU (rated AA+) from neutral to negative; the rating agency cited the high risk financing to member states without paying in capital.

¨    RBA is expected to stand pat today but retain its dovish tilt; we view the weaker AUD conducive for its domestic economic rebalancing but the prolonged period of low commodity prices and weak Chinese sentiments further support our mildly bearish AUD view. The bearish Chinese Caixin PMI reported yesterday signaled a deep contraction in the Chinese manufacturing sector (July: 47.8; June: 48.2), reinforcing expectations towards stronger fiscal spending and further PBoC rate cuts; stay mild overweight short dated CGBs. Turning to Indonesia, July’s CPI remains elevated at +7.26% y-o-y, driven by festive expenditures but softening core prices indicate waning underlying price pressure. BI remains constrained by the high headline inflation and weak growth for now; maintain neutral to mild underweight on IndoGBs and IDR. 

¨    USDMYR rose above 3.85, the highest since the Asian Financial Crisis; 12m NDFs breached 4.00 for the first time in history. The MYR remains undervalued in both REER and NEER terms but we expect the currency weakness to remain an overarching theme over at least 3Q15 being the country’s first line of defense to external volatility exacerbated by declining commodity prices.

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