Treasury pulse

  • Business
  • Saturday, 06 Apr 2013

Global forex market

MONTHS of speculation over the Bank of Japan's (BoJ) stimulus path has built up into this specific policy meeting that governor Kuroda pledged to do “whatever it takes” to end deflation, and return inflation to 2% within two years.

A 25% advance from US dollar/yen in less than six months carries a very clear fundamental drive outside of the normal bounds of risk trends or relative economic performance and that is the hallmark of excessive stimulus expectation, and markets are now expecting more than pledges and something beyond the anti-deflation credentials of BoJ.

The April 3-4 BoJ meeting turned out to be a surprise as markets expressed their support with the yen depreciated to trade above 96 compared to 93.32 in the early part of the week. Added to this was the announcement by Prime Minister Shinzo Abe to give every citizen the ability to print currency using a desktop computer application.

The reopening of European markets after the Easter holiday has brought fresh risk appetite, with European indices enjoying healthy gains. Markets didn't set to high expectations on the European Central Bank (ECB) given that its own policy bearings have been held broadly steadfast for some time (with a few words of concern about the euro and downgrade on growth forecasts). No talk of further easing has been offered by the ECB and with some kind of stability seen in Cyprus and region-wide austerity drive. Euro rebounded from recent low and kept above the 200MA of 1.2893. The ECB president Draghi appeared to leave the door open for a cut in official interest rates if forthcoming data in the weeks ahead show extended weakness in activity.

In response to these developments and weaker US data, the benchmark S&P 500 posted its biggest daily drop in five weeks and moved the market up to the lower boundary of this year's persistent bullish trend channel. The tension is high, but this has not yet upgraded to a truly serious risk aversion situation. The ADP national employment gauge showed that 158,000 private sector jobs were created in March, the weakest growth in five months and below expectations for a gain of 200,000 positions. Also, the ISM services index eased from 56.0 to a seven month low of 54.4 in March.

Australia was the best-performing major, after a better-than-expected trade balance emboldened the Australian dollar bulls, with the currency sitting just below a two-month high at 1.05. The Australian dollar was stronger also due to an upbeat central bank report, which cited a reduction in downside risk for the domestic economy. This left rates unchanged.

The ringgit ended the week on bullish tone with 1.1% appreciation against the US dollar following from Prime Minister Najib's announcement to dissolve Parliament in preparation for the 13th General Elections. Barisan Nasional currently controls 137 seats in Malaysia's 222 member parliament and Najib's popularity rating stands at 61% based on survey conducted from Jan 23 to Feb 6 by the Merdeka Centre for Opinion Research.

US Treasuries (UST) Market

US Treasuries advanced this week, with yields easing lower on the back of softer economic prints. Employment data for the month of March is expected to come in softer than the previous month. Yields on 2-, 5- and 10-year note seen easing to settle at 0.23%, 0.70% and 1.77% respectively at time of writing.

Malaysian bond market

This week saw the re-issuance of the seven-year Malaysian Government Securities (MGS) benchmark. The issue size of RM3.5bil was within market expectations. The tender attracted a bid to cover of 1.64 times with an average yield of 3.417%.

Trading in the MGS/GII was thin at the beginning of the week following the announcement of the tender. Market players were also on the sideline waiting for details of the upcoming election. Sentiment turned in mid-week following the dissolution of the current Parliament. Local bond activities picked along with the bullish sentiment in the ringgit. The newly re-issued MGS 03/20 saw trading volume reaching RM3.3bil at time of writing.

On private debt securities, total trading volume amounted to RM3bil, of which 69% came from the GG/AAA, 29% from the AA segments and the remaining trades from the single A segment. Daily average trade volume rose to RM742mil compared with RM740mil average seen in the prior week.

In the GG/AAA segment, active trading was seen on Manjung Island's bonds maturing 2018-2031, last dealt in the range of 3.71% to 4.43% with a collective trading volume of RM291mil. Other notable trades include the bank-guaranteed Boustead's bonds maturing in 2015, which attracted a total trading volume of RM280mil, last dealt in the range of 3.77% to 3.9%.

In the AA band, power-related bonds were flavour of the week. Tanjung Bin Power's bonds maturing 2019-2028 were well sought with a collective trading volume of RM165mil, last dealt in the range of 4.02% to 4.72%. Elsewhere, Gamuda 03/18 attracted a volume of RM135mil with yield easing 3bp to 4.02%.

MYR IRS market

The dissolution of the Parliament had minimal impact on the ringgit (MYR) interest rate swap (IRS) rates and rates only dipped towards the end of the week after US data disappointed and US Treasuries rallied. The IRS curve ended the week 1-3bps lower.

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