Treasury Pulse

  • Business
  • Saturday, 24 Mar 2012

Global foreign exchange market

RISK aversion prevailed this week, causing most Asian currencies to weaken against the US dollar. The commodity exporting nations that are closely linked to China were particularly affected.

Additionally, the dearth of positive US data allowed pessimism to creep into the markets. Currently, pessimistic themes prevailing are “recovery in the US versus moderating growth in China and Asia” and “higher oil prices sparking inflation”.

Fueling the pessimism was China's HSBC flash manufacturing PMI, which fell to 48.1 from 49.6 in February 2012, suggesting small and medium enterprises are still under pressure. New orders dropped sharply to 46.1 from 49.1, while new export orders increased to 48.7 from 47.4. The output index declined to 47.9 from 50.1. The contracting index prompted many to increase the likelihood of further monetary loosening by China.

At this stage of growth inflection, most analysts are reluctant to call for a convincing recovery of the US economy or alternatively say outright that it will be derailed by inflation caused by higher oil price.

We are nonetheless more optimistic and find the behavior of the safe haven US dollar irrational but however, economist John Keynes once said: “The market can stay irrational longer than you can stay solvent.”

On the home front, Bank Negara outlook for 2012 was 4%-5% of gross domestic product (GDP) growth, predicated that domestic demand is expected to remain resilient. Nonetheless, it is cognisant that slower growth in global demand may adversely affect the export-oriented industries in the manufacturing sector. The current account surplus is also projected to remain large at RM109.5bil and will be primarily supported by exports of commodities and non-electrical & electronic manufactured products. BNM is also cognisant that long-term capital flows are likely to moderate but short-term capital flows could more volatile. Lastly headline inflation is expected to moderate in 2012, averaging between 2.5% and 3%.

This week the ringgit weakened in tandem with regional currencies to a high of RM3.0828 weakening by 0.91%. In tandem, the Bloomberg-JPMorgan Asia Dollar weakened to 116.54 from 117.07 at the beginning of the week. Most Asian currencies outperformed the ringgit save for the rupee. The yen, which was sold down considerably last week by 1.41% gained 0.66% to close at 82.83 to the US dollar at the point of writing.

The Bank of Thailand also held key benchmark interest rate firm at 3%, similar to other Asian central banks we saw the last few weeks. This mode of “wait and see” for further development of the global economy, should prevail until the global economy shows more traction or inflation reveals its ugly side.

One should not forget, the market is fickle, and swings from optimism and pessimism. We portend that once the optimism returns, the ringgit and Asian currencies should gain strength but recommend caution, lest we forget the words of the famous economist John Maynard Keynes: “The market can stay irrational longer than you can stay solvent”.

US Treasuries (UST) market

This week, US Treasuries was seen rebounding a tad higher with yields easing by 4-10 bps across the maturity spectrum versus Monday's close level. Safe haven US Treasuries pared earlier loses after reports this week showed eurozone's output contracted further, while US housing starts eased on monthly basis. Housing starts in February declined by -1.1% month-on-month versus a revised level of 3.7% back in January. At time of writing, yields on two-year note settled at 0.36% while 10-year was seen hovering at about 2.29% level.

Malaysian bond market

This week, trading volume in local govvies was generally thinner with most players preferring to stay on the sideline awaiting details of local CPI data. At time of writing, the official February CPI data has yet to be released. Meanwhile a Bloomberg survey expects inflation to moderate to reach 2.4% year-on-year. On a related note, details of the upcoming new 7.5-year GII was announced with issue size worth RM4.5bil. Tenders results for the mentioned bonds scheduled on March 29.

In the Malaysian Government Securities/GII market, RM9.6bil trades were transacted with a daily average trading volume of RM2.4bil versus last week's average of RM3.4bil.

As of Thursday's close, most of the benchmark yields across the maturity spectrum aligned 1-5 bps higher compared with last week's close. The three-year benchmark yield rose 5 bps to close at 3.11% while the five-year benchmark yield climbed 2 bps to 3.26%. The seven-year and 10-year yields aligned 2-4 bps higher to close at 3.60% and 3.91%, while 15-year and 20-year settled at 3.91% and 4.03% respectively.

In the private debt securities market, a total of RM2.1bil worth of trades were done with 48% coming from the GG/AAA segment, 50% from the AA segment and remaining balance from the single-A segment. For the week, daily average trade volume was RM531mil, easing from the RM899mil average seen previously.

In the GG/AAA segment, active trading interest was seen in PLUS bonds maturing 2018-2028 with a total of RM535mil worth of trades transacted. Interest was also seen in the Prasarana bonds maturing 8/26 with RM115mil trades done.

In the AA-segment, trading interest was on the power sector bonds. Tanjung Bin Energy bonds maturing 2017-2032 reported trades of RM520mil done. This was followed by Sarawak Energy 6/21 and 1/22 with a total of RM85mil trades. Within the single-A segment, RM24mil worth of trades were transacted for banking sector bonds. Trading interest emerged for a slew of banking names Bank Muamalat 6/16, OSK Investment Bank 5/15 and AmIslamic Bank 9/16.

Ringgit interest rate swap (IRS) market

Worsening economic data from China and slide in equity markets prompted selling in the ringgit IRS market and thus capping the recent sharp rise. Overall, the ringgit IRS rates ended the week 1~ 5 bps lower.

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