Breakthrough in Greek EUR10.3bn Debt Bailout Buoyed Peripheral EGBs

26 May 2016

Rates & FX Market Update

Breakthrough in Greek EUR10.3bn Debt Bailout Buoyed Peripheral EGBs

Highlights

¨   Global Markets: The 5y UST new issuance received strong demand, with the share anchored by indirect bidders climbing higher to 66.6% (April: 63.4%); BTC ratio surged to its 1-year high of 2.60x despite lower cutoff yields at1.395% (April:2.41x; 1.410%). The strong demand at recent UST auctions remain suggestive of lingering skepticism for FOMC to raise FFR in June amid the mixed bag of results, in particular the softer service PMI released yesterday, ahead of Brexit referendum results; maintain mild overweight stance on USTs and remain cautious on chasing long positions on USD. Meanwhile, the breakthrough in Greek EUR10.3bn debt bailout drove strong gains on peripheral EGBs, where yields on 10y declined 6-7bps for the bloc; yields on 10y GGB declined below 7.00% for the first time since November 2015. EURUSD inched higher overnight to 1.116, where the unbalanced and anemic economic recovery in the EU bloc could keep ECB’s heavy hand on easing over the medium term, exerting bearish pressure on EUR; maintain mildly bearish stance on EUR.

¨   AxJ Markets: After recording 2 months of consecutive export growth, Thai exports slumped 8.0% y-o-y in April (March: +1.3%); trade surplus printed wider than expected at USD721m amid import compression (April: -14.9% y-o-y; March: -6.9%). Despite the underwhelming trade data, movements on USDTHB remained relatively static as the government has been pre-empting investors on the weak outlook for exports, forecasting 2.0% decline for 2016; maintain neutral stance on THB. Elsewhere, BI governor has cited the possibility to reduce rates further in June to stoke the slowing economy following concerns of a disappointing 1Q16 which prompted BI to downgrade its 2016 GDP forecast from 5.2-5.6% to 5.0-5.4%; maintain neutral stance on IndoGBs.

¨   USDKRW declined overnight by 0.83% to 1,182 even as Finance Minister Yoo commented on the low likelihood for additional fiscal stimulus over the medium term. However, we remain of view that the challenging external environment and sluggish domestic economy is likely to exert pressure on growth, compelling BoK to reduce rates by 25bps over the coming months; maintain mildly bearish KRW with a YE16 target of 1,240/USD.