RHB FIC Rates & FX Market Update - 5/8/15

5 August 2015

Rates & FX Market Update

Lockhart’s Hints on September Rate Hike and Respite in Oil Prices Drove Yields on USTs Higher; RBA and RBI Held Rates

Highlights

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¨    Lockhart, a voting member known for his centrist views, shared his inclination towards a September Fed rate hike. That together with the brief respite in oil prices led to USTs yields squeezing higher by 5-9bps across the curve. Fed Fund probabilities of a September rate hike rose to 48% from 38% previously, where focus is likely to remain on Friday’s labour data prints. We remain positioned for UST flatteners amid the subdued inflation outlook and increasing pricing in of a FFR hike. Over in EU, longer dated Bund tracked USTs higher amid a quieter session, shrugging off the impact from persistently declining PPI. EUR traded weaker against the strengthening USD where we expect the array of services PMI prints due today to compound on the strong manufacturing PMI prints released earlier, keeping the EUR supported above its 1.08/USD support.

¨    The INR appreciated to 63.75/USD following RBI’s decision to hold rates at 7.25%, constrained by CPI pressures, but kept the doors open for further policy accommodation. We maintain expectations for further RBI easing over the next 6-12months which should keep short dated GSecs firm. Additionally, RBI’s Rajan reiterated support for the formation of a Monetary Policy Committee without the governor having veto powers which could increase perceptive views. Meanwhile, IMF hinted at a possible delay in CNY SDR inclusion approval to September 2016, which could indicate IMF’s propensity towards including CNY into the SDR amid further Chinese disclosures and reforms; CNY remained firm at 6.21/USD, supported by stable Yuan fixings. 

¨    Short covering on AUD yesterday supported a strong rebound to 0.7381/USD (+1.44%) following RBA’s statement. Notably, although RBA’s comments on further warranted depreciation in AUD were omitted, the current mildly bearish stance on AUD remains appropriate, underpinned by bearish outlook on commodity prices, weak Chinese sentiments and Fed hike expectations.

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