RHB FIC Rates & FX Market Weekly - 12/10/15

12 October 2015

Rates & FX Market Weekly

CPI and Labour Data Key to Watch As Global Central Banks Turn Dovish; Heavy Data Week in China Could Reveal Softer Economy

Highlights

¨   Global Markets: Risk appetite appears to be recovering modestly as investors lose conviction of any FFR liftoff this year; DM central banks are turning more cautious on the global outlook as well, although Fed’s Yellen claims that a rate hike this year is not off the cards. Fedspeak and beige book in the week ahead may provide further clarity after the dovish FOMC minutes. US CPI remains noteworthy, where a softer print underscores the benign inflation trend globally; stay mild overweight on USTs on elevating fears towards the global outlook. In UK, expect investors to scrutinise the CPI and labour data, after BoE decided to leave rates unchanged without any additional dissidents. Any signs of strength should further support the case of lift off; remain mildly bullish GBP. Over in EU, the lackluster flash CPI print underpins our view for further ECB action to maintain price stability, while IP is likely to soften amid poor manufacturing PMI; we remain constructive on EGBs. Expect little surprises from September BoJ minutes while the volatile IP prints may continue eroding BoJ optimism, supporting BoJ easing expectations leading to the 30 October MPM; the increasingly risk-on sentiment may suggest for USDJPY to break out of its tight trading range. Australian CPI and labour data may draw attention, after RBA kept its tone unchanged. We continue to opine a moderate likelihood for further RBA monetary easing; stay mildly bearish AUD.

¨   AxJ Markets: Heavy economic calendar in China with softer CPI and PPI prints suggest maneuverability for PBoC to ease to alleviate downside growth pressures; remain constructive on short dated CGBs. Aggregate financing and new yuan loans in September are also expected to climb modestly m-o-m following PBoC’s decision to ease monetary policies in August in order to offset the tighter domestic liquidity conditions spurred by capital outflows. Meanwhile, while we expect BoK to hold rates in its MPC meeting in the week ahead, potential downward revisions to growth forecasts could compel the central bank to maintain its dovish inclination over the medium term despite the rising household debt, favouring short KTB tenors; expect strong demand for 5y KTB auction. Elsewhere, Singapore’s 3Q GDP print and MAS MPS decision will be due on 14 October where we expect MAS to stand pat, although underperforming NODX and IP increasingly points toward the possibility of a technical recession could see a change in view. We expect a relief rally on SGD towards its recent peak of 1.388/USD should MAS maintains status quo, but unsustainable with the impact from weaker Chinese export demand likely fueling easing speculations through 2015. BI reconvenes on 15 October, where we expect them to stand pat, constrained by the high headline inflation and capital outflow pressures despite the sluggish growth outlook. Indonesia’s trade balance is likely to remain positive, as import compression persists amid the depreciating IDR; we stay bearish on IDR as the weak fundamentals remain vulnerable to global capital shifts, despite the brief relief rally. Malaysia’s CPI is expected to soften slightly as the GST impact fades off, although it will not be sufficient to sway BNM towards further easing; despite the recent strong performance of the MYR, we stay cautious of the relief rally as global uncertainties linger on, even as fundamentals remain relatively sound. India’s CPI and WPI due the week ahead is unlikely to materially influence RBI’s final rate decision this year, where we opine for a hold decision, as the bank observes the impact of the rate cut; stay constructive on INR.

   

Selected Trade Reviews:

¨   Trade Idea: Long 2y ACGB vs 2y UST (Entry (5 Oct): 124bps; Current: 124bps; Stop Loss: 140bps; Target: 95bps)

Further RBA easing to drive US-Australia monetary policy divergence

¨   Trade Idea: 3/10y CGB Steepener (Entry (29 Sep): 37bps; Current: 34bps; Stop Loss: 10bps; Target: 77bps)

Short-dated CGBs to be the main beneficiary of further policy accommodation; supply risks to underpin the underperformance in mid/long tenor CGBs

¨   Trade Idea: Long GBPSGD (Entry (23 Sep & 6 Oct): 2.1632; Current: 2.1563; Stop Loss: 2.0849; Target: 2.3000)

Threat of technical recession in Singapore to drive SGD NEER easing

Weekly Positioning

	Rates	FX
Overweight
Mild Overweight	UST, C.EGB, GolSec	USD, JPY
Neutral	P.EGB, ACGB, GILT, MGS, CGB	HKD, INR, GBP, EUR
Mild Underweight	KTB, SGS, IndoGB, JGB, HKGB, ThaiGB	AUD, THB, CNY, SGD
Underweight		KRW, MYR, IDR