RHB FIC Rates & FX Market Update - 6/10/15

6 October 2015

Rates & FX Market Update

Dismal Services PMI Rekindled Concerns Over Global Growth Trajectory

Highlights

¨   While the broadly softer US services PMI and ISM services fueled concerns of a slowing growth momentum, UST yields climbed 3-6bps overnight after strong gains over the past few sessions where we continue to stay mild overweight USTs supported by expectations for further delays in FFR liftoff amid the uncertainty alongside tepid CPI pressures. In UK, September services PMI dipped to 53.3 (August: 55.6), the weakest pace of expansion in over 2 years, suggesting for BoE tightening schedule to remain at bay; GBP traded weaker overnight to 1.51/USD. We remain constructive on GBP over the medium term, underpinned by the firm rise in UK wages which remains a strong catalyst for BoE to retain its hawkish tilt. Similarly, EU PMI printed softer (53.7; August: 54.0), with only France recording a faster pace of expansion; maintain mildly bearish on EUR on further ECB PSPP expansion. Over in Japan, wage growth remains tepid, raising concerns over consumption and inflation trajectories; JPY fell 0.4% overnight where we opine a moderate likelihood for further easing measures during the BoJ meeting at the end of the month, but any weakness to remain limited over the longer term as safe haven flows continue to dominate.

¨   AxJ currencies were broadly stronger overnight amid better risk appetite; MYR and IDR were c.1% stronger. In South Korea, BoK governor Lee disagreed with lawmakers over the incremental need for further rate cuts, citing moderate economic recovery. However, rising downside risks to growth may eventually compel BoK’s hand; remain mildly bearish on KRW. Indonesia remans committed to boost investments and growth, with the 3^rd economic package due Thursday that may offer low-cost credit to labour-intensive exporters hurt by the lack of global demand; we stay bearish on IDR over the short term as lingering risk aversion exposes the currency to further downsides.

¨   AUDUSD gained c.0.4% overnight on better risk appetite, remaining above 0.70 ahead of the RBA meeting today. We expect the MPC to remain open towards further easing, as external gyrations persist alongside weaker trade dynamics and the need to support long term economic rebalancing. We continue to call for a moderate likelihood for further RBA easing over the next 3-6 months; stay mildly bearish AUD.