Treasury Pulse

  • Business
  • Saturday, 19 Jun 2010

Global Foreign Exchange Market

Weeks of heightened volatility in the foreign exchange market prompted South Korea and Indonesia to introduce controls to reduce the adverse implications of uncontrolled speculative capital flows. Banks in South Korea will now be required to rein in the use of currency forwards, options and swaps within three months to comply with a regulatory limit. In Indonesia, a minimum one-month holding period for short-term central bank bills is imposed to prevent excessive speculations on its currency.

The week witnessed a recovery in investors’ risk appetite following a positive indication by Moody’s that most major banks in the EU passed its “stress test”. Moody’s test gauged the banks’ exposure to debt in Greece, Portugal, Spain and Ireland. Its results showed that more than 30 EU banks were capable of absorbing losses without requiring additional capital even under worse-than-expected conditions with average regulatory capital ratio registering well above 9%.

Moody’s affirmative report precipitated a recovery in EUR/USD to levels above the 1.2300-handle, its highest in two weeks.

Nonetheless, investors remained cautious over unresolved structural issues in Europe after El Economista reported that the EU, IMF and US Treasury, were jointly arranging a credit line worth 250 billion euros for Spain. Although the report was quickly refuted by authorities, market skepticism led to a widening of Spain’s sovereign spread. Spain’s 10-year Government bond spread over German bunds rose to 220 bps, the widest level since euro’s debut in 1999.

In the UK, market awaits the announcement of an emergency budget from the new coalition government scheduled on June 22. The government is expected to outline a widened tax base and spending cuts to mend UK’s record budget deficit of 11.1% of gross domestic product, the highest since World War II. Market expectations of a cohesive action by the government prompted GBP/USD to recover, trading near its one-month high of 1.4800.

Economic data out of the US remained mixed. While industrial production rose by a better-than-expected 1.2% in May, housing market as gauged by the NAHB Index declined 22.7% in June from a month earlier. It seems that homebuyers’ interest is waning following the expiration of the US government’s home ownership tax credit.

On a separate note, risk aversion emanating from eurozone’s debt crisis fuelled a surge in foreign holdings of US Treasuries in April. The Net Long-term TIC Flows Transactions soared to US$83bil, higher than market’s expectation of US$70bil.

Asian markets remained buoyant during the week with Indonesia indicating that its economy could expand by 6.1%-6.4% while the Philippines revised its growth forecast to 6% from 3.6% earlier. Vibrant economic data in Asia prompted a rally in Asian currencies with the Bloomberg-JP Morgan Asian Dollar Index gaining close to 1% during the week.

Political rhetoric by US officials, coupled with accelerating inflation in China continued to nurture speculations on the yuan revaluation. Yuan’s 12-month non-deliverable forward is currently pricing-in an appreciation of 1.2% from the spot rate of 6.8312 against US dollar.

In tandem with stronger regional currencies, the ringgit strengthened during the week, trading within a range of 3.2480 to 3.2808 against the dollar. As at noon on Friday, the ringgit traded at 3.2570 against the dollar, gaining 0.7% from a week earlier.

In the near term, investors will likely focus on economic data and further developments in Europe for fresh leads. Spotlight could shine on Spain as its 16.2bil-euro government bond matures in July. As such, we maintain a cautious stance as the coming weeks could witness a return of volatility. It is likely that USD/MYR could trade in a range of 3.2200 to 3.2800 in the coming week.

US Treasuries (UST) Market

USTs traded relatively flat during the week with the 2-year, 10-year yields registering 0.71% and 3.2% at the point of writing.

Malaysian Bond Market

Interest rate risk remains a longer term threat to the bond market although we think there is now less pressure on regional central banks to raise interest rates in the wake of potentially slower global economic growth as a result of the European debt crisis.

With interest rates potentially going up and the economy improving (and with it the credit profiles of corporate borrowers), the investment case for corporate bonds appears compelling. For a start, corporate credit spreads against cash rates are still generous, with AA-rated and below PDS currently exhibiting spreads of 200-600 bps against the overnight policy rate (based on 5-year PDS yields as reference). Corporate bonds also offer attractive yield pickup particularly as one ventures further down the credit curve to the AA-rated and below segments where yields are often richer and somewhat less correlated with interest rate movements.

Buying interest was seen in the MGS/GII market on expectation of a stronger ringgit. As at market close on Thursday, benchmark yields closed lower with the 3-, 5- and 10-year MGS closing at 3.17% (-5 bps w/w), 3.58% (-3 bps w/w) and 4.04% (-4 bps w/w), respectively. The 20-year yield shed 4 bps w/w to 4.53%. Daily trade volume averaged RM1.1bil, slightly higher than the previous week’s RM976mil.

On a related note, the new RM2.5bil 10-year GII’06/20 attracted strong demand during the tender with a bid-to-cover ratio of 2.274 times at an average yield of 4.284%.

In the PDS market, daily average trade volume was RM225mil versus last week’s RM221mil. Of the total trades, 56% were contributed by the double-A segment, 34% by the GG/AAA segment and 10% by the single-A segment.

Within the AAA segment, 1MDB’05/2039 dipped 30 bps to 5.15% and PLUS’06/2011 closed 3 bps lower at 3.09%. Yields of AA1-rated finance/banking papers like Maybank’11/2010, Hyundai Capital’05/2011 and Public Bank’11/2014 all closed lower at 3.15% (-3 bps), 4.19% (-20 bps) and 4.47% (-3 bps) respectively.

MYR Interest Rate Swap (IRS) Market

MYR IRS rates continued to grind higher during the week as improved sentiment and local hedging activities exerted upward pressure on rates. Asian stocks were on their longest winning streak in 11 months and gold is trading near its record high. Overall, the yield curve steepened by circa 3 ~ 11 bps.

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