RHB FIC Rates & FX Market Update - 22/10/15

22 October 2015

Rates & FX Market Update

Dovish ECB Rhetoric to Set Market Expectations

Highlights

¨   UST yields declined 1-4bps overnight on risk off sentiment amid declines in crude oil prices, in an otherwise quiet event calendar. We continue to stay mild overweight on USTs on further global downside risks; expect FOMC to stand pat in the week ahead as economic conditions have yet to improve substantially since the last meeting. Also, BoE’s study on EU membership concluded that being part of the bloc has resulted in a more open and dynamic economy, but increases vulnerability to any gyrations within the Eurozone. The study should lend some support to opponents of Brexit; remain constructive on GBP. 10y EGBs (excluding Portugal) rallied 6-7bps ahead of ECB’s decision later amid investors’ repositioning ahead of any potential expansion to the PSPP. While we expect no incremental easing during this meeting, we look for further hints of potential ECB actions and dovish rhetoric to support our mildly bearish EUR call.

¨   Moving to AxJ, the new BoT governor committed to maintain accommodative monetary policies amid the challenging external backdrop where we continue to see the likelihood for another 25bps BoT rate cut over the near horizon as weak consumer and investors’ confidence provide little aid to the tepid domestic economy; stay mildly bearish on THB. Elsewhere, China’s NDRC took another step in reforms, reducing earmarked item price controls by 80% to support a rational and transparent pricing regulation, which could help to reduce burdens on state government over the longer term; CGBs remained stable amid a quiet session. In Indonesia, the government-sponsored infrastructure financing guarantee agency may be allowed to guarantee additional projects alongside a possible acceleration of SME lending; new reform measures to support Indonesia’s slowing growth. However, Indonesia’s twin deficits continue to weigh on IndoGBs and IDR; stay bearish on further risk off sentiment.

¨   AUDUSD declined 0.67% overnight on poor risk sentiment alongside jitters over China. Australia’s business confidence tumbled in 3Q (0; 2Q: 4), highlighting the tough operating environment currently. Further RBA easing remains on the cards to support economic growth and rebalancing; stay mildly bearish on AUD, keeping a close watch on key economic, housing and labour data.