RHB FIC Rates & FX Market Weekly - 30/11/15

30 November 2015

Rates & FX Market Weekly

Eventful Week Ahead With ECB, RBA, RBI and OPEC Meetings, Alongside US NFP and Fed’s Beige Book

Highlights

¨   Global Markets: With expectations running high for Fed to hike FFR by 25bps in December, NFP in the week ahead will be key to watch; only a significant miss against consensus estimate (c.200k) can dampen the current hawkish expectations. Yellen’s presentation before Congress, the final public remarks before the 17 Dec FOMC meeting, may reveal her policy inclinations which will be scrutinised by investors; we remain mildly bullish on USD. Following ECB’s Draghi dovish rhetoric, expect scrutiny over staff’s macroeconomic projections and ECB’s monetary policy decision; while market views are mixed at the moment, we opine that anything less than 10bps of rate cut and EUR15bn of PSPP expansion should disappoint markets. We prefer to maintain a light EUR positioning into the ECB meeting. In UK, investors point to a series of PMI data and BoE’s Financial Stability Report to drive movements in the week ahead; remain mildly bullish on GBP over the medium term but current technical and BoE’s dovish rhetoric may exert downward pressure over the near term. Over in Japan, while pertinent data released in the week ahead is likely to remain marginal on the JGB market, the persistently weak IP print is likely to overshadow the expansionary PMI prints, keeping the USDJPY pair above its 122 support despite rising geopolitical tensions; keep a neutral stance on JPY. In Australia, expect RBA to stand pat on Tuesday while keeping an eye on GDP, building approvals, trade and retail sales data for hints of Australia economic rebalancing progress; remain cautious on AUD where any negative surprises can drive further easing speculations.

¨   AxJ Markets: Investors will eye China’s PMI data, with manufacturing PMI expected to remain in contraction; expect modest expansion in services PMI unlikely to boost better risk sentiment. We continue to expect a mildly bearish CNY given the economic rebalancing alongside overvalued REER, while maintaining mild underweight CGBs amid oversupply concerns. Elsewhere, with the final South Korea’s 3Q GDP print unlikely to deliver big surprises, BoK may continue to adopt a wait-and-see approach, supported by stabilising CPI; yields on KTBs may tread higher in the week ahead. Meanwhile, both Singapore and Hong Kong manufacturing PMI are expected to remain in contraction, weighed by weaker global demand; expect USDSGD to remain range bound within 1.40-1.42. In Malaysia, Nikkei PMI and trade data may unveil further signals of the economic growth pace; remain cautious on MYR on the strong USD. In Thailand, expect external balances to remain strong amid slumping imports, while the economy remains mired in deflation; stay mildly bearish on THB given the likelihood of another rate cut by BoT in 2016. In Indonesia, expect further softening in November CPI print as the impact from last year cut in fuel subsidies fade off, but unlikely to push BI into further easing this month ahead of the FOMC meeting; stay bearish IDR as twin deficits may exacerbate capital outflows on any rebalancing. In India, expect 3Q GDP print to remain above 7% y-o-y, reaffirming India’s outlook differential versus EM peers. RBI also reconvenes on 1 Dec, where a status quo decision is likely following the front-loaded 50bps rate cut in September; stay neutral INR.

Selected Trade Reviews:

¨   Trade Idea: 3/7y ThaiGB Flattener (Current: 77bps; Entry (22 Jul): 85bps; Target: 70bps; Stop Loss: 105bps)

Increasing attention towards a newly drafted constitution in 1Q16 are likely to limit investors’ appetite for duration, anchoring the short dated ThaiGBs and posing risk to the flattener position; target to take profit over the very near term

Trade Idea: Long 2y KTB vs UST (Entry (28 Sep): 91bps; Current: 90bps; Stop Loss: 110bps; Target: 75bps)

Limited risks arising from higher global rates by taking a short UST position, as the Fed signals a possibility of lift off over the near term

Trade Idea: Short EURINR (Entry (13 Jan): 72.235; Current: 70.623; Stop Loss: 77.000; Target: 67.500)

Higher likelihood of additional ECB stimulus, offsetting the narrowing yield differentials between EU and India

Weekly Positioning

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