Treasure pulse

  • Business
  • Saturday, 23 Jul 2011

Global foreign exchange market

HEADLINE risks remain dominated by US debt ceiling and European peripheral debt crisis this week amid policy uncertainty and potential stalemate. The euro and the US dollar both came under pressure at the start of the week due to debt woes.

Euro/US dollar surged 1.76% this week and traded around 1.4380 levels at the point of writing after the Greek bailout package was well received.

In the United States, there is still very few sign of progress on raising the country's debt ceiling ahead of the Aug 2 deadline. If Friday comes to pass with no major news, we could see panic selling of the US dollar and this would trigger sharp volatility across the financial market. Mixed US economic reports put extra pressure on the greenback while report from Standard & Poor's was another factor causing a new wave of US dollar selling, prompting the US Dollar index to decline by 1.52% to 74.11.

An improvement in risk appetite combined with stronger economic data has helped to lift the British pound 1.05% to above 1.6300-region. With the fate of high beta currencies tied to the European sovereign debt crisis, what is good for the eurozone is good for the United Kingdom. In terms of economic data, pound traders were also pleased to see retail sales rebounded 0.7% month-on-month in the month of June.

The Japanese yen had strengthened 0.78% during the week. Japan posted a merchandise trade surplus of 70.7 billion yen in June, heading back into positive territory after two months of deficits following the devastating natural disasters on March 11.

With improved market sentiment fueling more risk flow, the Australian dollar pushed through the 1.0800 level while the New Zealand dollar reached all time high against the US dollar at 0.8643. Meanwhile, gold posted new record highs this week and reached US$1606 per ounce. This strength is likely to remain until a debt-ceiling deal is reached in the United States.

Inflationary pressures continue to creep higher in Asian economies. Hong Kong's consumer price index grew for the eighth consecutive month in June to 5.6% year-on-year (y-o-y) from 5.2% in May. Elsewhere, Singapore's non-oil domestic exports grew slower than expected at 1.1% y-o-y in June, compared with 7.6% rise in May. China's manufacturing Purchasing Managers' Index fell to a 28-month low of 48.9 in July.

Asian currencies strengthened as risk-averse sentiments abated. The Bloomberg-JPMorgan Asia Dollar index rose by 0.41%, while the ringgit strengthened to trade at 2.9800-region. As it stands, volatility in the foreign exchange would remain high in the coming weeks on better sentiment thanks to positive developments at European Union summit.

One of Greece's problems financing uncertainty has been removed while voluntary private investors' participation may avert a credit downgrade and benefit from a more stable financial and economic environment. This should lift investor appetite.

Focus is now on the implementation. Possible jump in appetite for risk, firm underlying ringgit fundamentals and pressure on Bank Negara to hike rates to curb rising prices should push US dollar/ringgit lower. As such, we are of the opinion that US dollar/ringgit could trade in a range of 2.9650 to 3.0100 in the coming week.

US Treasuries (UST) market

During the week, the UST yields aligned higher with the two- and 10-year UST yields increased 4bps and 9bps to trade at 0.387% and 2.997% respectively.

Malaysian bond market

This week, trading in local govvies saw thinner volumes with players preferring to stay on the sideline ahead of June CPI data release and details of upcoming 10-year GII reopening. Domestic inflation accelerated to reach a 37-month high of 3.5% y-o-y in June (May: 3.3% y-o-y) but was slightly lower than the Bloomberg consensus for a 3.6% gain. The increase in price was mainly driven by supply shocks sending food, transport and energy indices to edge higher. At time of writing, details for the upcoming 10-year GII reopening was announced with an issue size of RM4bil. Auction for the mentioned bonds will be held on July 28.

In the Malaysian Government securities (MGS)/GII market, RM9.5bil worth of trades were transacted with a daily average trading volume of RM2.4bil, markedly lower than previous week's daily average of RM4.2bil. Trading activities remained focused on the belly of the yield curve, with RM2.1bil trades done on the five-year benchmark MGS. As of Thursday's close, the benchmark yield curve aligned higher with the three-, five-, seven-, 10-, 15- and 20-year benchmarks closing unchanged to 2 bps higher during the week to close at 3.26%, 3.5%, 3.7%, 3.88%, 4.04% and 4.18% respectively.

In the public debt securities market, a total of RM870mil worth of trades was transacted with a daily average trade volume of RM218mil. The GG/AAA and AA segments contributed 34% and 66% of trades respectively. Within the GG/AAA segment, notable transactions were seen on Cagamas bonds maturing 2012-2014, which closed mixed at 3.41%-3.68% with RM102mil done in total, and Danga Capital 4/15 which closed little changed at 3.86% with RM50mil done.

In the AA segment, trading interest was seen in banking bonds. Yields on CIMB 4/16 closed 3 bps lower at 4.1% with RM100mil done, Sabah Development Bank 8/11 closed 5 bps higher at 3.38% with RM70mil done, while AmIslamic 9/17 closed unchanged at 4.25% with RM40mil done.

Ringgit interest rate swap (IRS) market

Ringgit IRS rates traded 3-5 bps firmer on slightly better global risk sentiment. Trading activities were somewhat lackluster as market awaits mid-week June CPI data (released at 3.50%) and the announcement of the 10-year GII issuance.

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