AT long last, US Federal Reserve chairman Ben Bernanke has offered some numerical guidance on the tapering off of quantitative easing (QE). That debate has roiled markets for the past month.
It clearly hinges on the unemployment rate, and it is falling in line with the better projections that the Fed communicated in a release in the middle of the week. On average, the Fed now expects the unemployment rate to drop to 7.2%-7.3% by year-end, a tick or two better than what it envisioned in March.
“If the data are broadly consistent with this forecast, the committee anticipates that it would be appropriate to moderate the pace of purchases later this year.” Bernanke added that QE3 could be ended altogether once the unemployment rate drops to 7%.
The key risk now is that shallow financial markets will amplify any tapering of the QE by the Fed. The US dollar (USD), as an immediate response, as measured by US DXY rallied 0.86%, 10-year US Treasuries (UST) rose 7.6% to 15-month high of 2.35%, commodity prices down : NYMEX US$0.52 to US$97.72 but stocks tank -1.35% or -206 points. The Fed has held interest rates at close to near zero since December 2008 while more than tripling its balance sheet to US$3.3 trillion.
And in the case of eurozone, the key message from the G8 leaders this week was to expedite efforts to form the banking union. The main bugbear in the game-plan is the difference in opinions between the central bank and the national governments on the level of commitment required from the concerned parties and loss of sovereignty, by extension.
At the same time, the euro downside may prove modest for now after a report showed that German investors’ optimism brightened more than expected in June and that eurozone construction output rose to 2% month-on-month in April, reversing a decline of 1.8% in March. As a result, the euro kept firm and in-sight of four-month highs against the dollar and strongest in 22 months against the Aussie dollar.
Moving from lows of 94.823 the USD/yen was one of the biggest winners from Bernanke’s statement as it opens stronger at a rate of 96.347. At the same time, the yen sentiment seemed to draw support from trade figures that showed exports grew by 10.1% in May – the fastest since December 2010. And the trade deficit widened by a smaller than expected 993.9 billion yen from a shortfall of 362.4 billion yen in April. The downward spiral of the yen which last month sank to 4½-year lows against the greenback was seen as a boon to Japanese exports which are considered the lifeblood of the world’s third largest economy. The yen has staged a remarkable rebound from last month’s depths as persistent market volatility has fanned steady demand for safety in the Japanese unit and an unwinding of bets on further short-term weakness.
Into Asian currencies, Bloomberg-JP Morgan Asia dollar index edged lower towards support at 115.68, weighed by a USD rally along with higher USD/yuan fixing and bearish macro data flows. The Indonesian rupiah tested above the 10,000 level again despite market rumours that Bank Indonesia sold about US$200mil to support. The Philippine peso closed above the 43.00 level for the first time since Jun 2012, underpinned by tapering concerns about the Fed QE tapering.
In the case of the ringgit (MYR), it gapped up significantly to challenge the 3.200 level – last seen since June 2012 to be the top loser among its peers under the strong influence of strong US dollar, higher USD-yuan fixing and as the Singapore dollar NEER trades 0.24% below the trading band. Singapore dollar/MYR is continuing its upward tilt toward 2.5250 level after ending above the 2.500 level for the third straight session. Macro data wise, Malaysia reported higher headline inflation rate of 1.8% in May, the highest in more than a year, after rising to +1.7% in April and compared with +1.6% in March due to faster increase in the core inflation.
With the Fed rhetoric sounding a tad more hawkish following some clarity on the timeline for possible tapering, we saw players’ expectations mounting on possible higher yields lingering further. Yields seen edging higher on US Treasury notes with two-, five- and 10 seen hovering at 0.33%, 1.3% and 2.42% respectively.
Malaysian bond market
Local govvies traded on a softer tone this week, tracking higher UST and weaker MYR performance. There are concerns over Fed’s possible tapering of its bond purchase programme in the later part of 2013 with a halt to bond purchases by mid-2014. This sent UST yields surging higher across tenures. Local govvies yield continue to surge higher as of Thursday’s close but upwardly movement in yields somewhat prompted bargain hunting, paring some of their earlier losses. As of Thursday’s close, benchmark Malaysian Government Securities yields for three-, five-, seven-, 10-, 15- and 20-year were seen closing at 3.26%, 3.31%, 3.49%, 3.55%, 3.78% and 3.95% respectively. About RM11.4bil worth of trades are transacted with daily average trading volume of RM2.8bil compared with last week’s RM2.4bil.
Moving into the local PDS space, total trading volume amounted to RM3.6bil, of which 62% came from the GG/AAA segment, 38% from the AA segments and a handful from the single-A segment. Daily average trade volume was higher at RM909mil compared with the RM724mil average seen in the prior week. In the GG/AAA segment, active trading was seen for PLUS ‘12/38 and Prasarana ‘05/23 which were last done at yields of 4.5% and 3.8%, respectively.
In the AA segment, financial and power sector-related names continue to attract active trading. OCBC Bank ‘11/15 attracted trading volume of RM55mil with yields traded relatively unchanged at 3.76%. From the power sector, RM69mil of Malakoff papers maturing 2014-2024 changed hands at higher yields in the range of 3.83% to 4.7%. Other notable trades involved the BGSM ‘12/19 with RM200mil in trades done on this name, some 4bps higher at 4.56%
MYR IRS market
MYR interest rate swap (IRS) rates jumped significant higher after the Fed announced its intentions for the bond purchase programme. The IRS curve ended the week circa 2~18 bps higher.
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