DESPITE comments from US Federal Reserve chair Janet Yellen that interest rates would remain at near zero for a “considerable time,” the net effect of her comments have seen the US dollar strengthening.
While the move to higher rates remains highly conditional and linked to the performance of the broader economy, many forecasters have remained relatively optimistic in their estimates surrounding tighter monetary controls.
The Federal Open Market Committee’s communication on inflation has been flip-flopped in recent months following upside surprises in April and May, of which Yellen described the firming in inflation as “noise” in June and now the committee downgraded its description of inflation in response to latest’s surprisingly low August CPI print.
Consequently, the euro fell to lowest since mid-2013 and the yen clambered above a six-year low – a high not seen since Sept 9, 2008’s 109.08 under the solid coating of market risk aversion. The little breathing space created to the recently battled single currency as the euro’s consumer prices unexpectedly got revised up to a still dangerously low 0.4% for August didn’t last long as markets remained preoccupied with idea of quantitative easing.
Meanwhile, the pound ended close to 3 cents above recent November lows supported by data on UKlabour market. Minutes from the Bank of England that showed two members of the bank voted for an immediate rate hike, as minutes showed another split, 7-2 votes. Overall, the currency wasn’t out of the woods ahead of the big Scot vote but if a vote that keeps Scotland in the United Kingdom could really see the currency take off.
Underpinned by overall US dollar strength, all Asian currencies were having a cautious close. The rupiah suffered most selling with 1.78% losses against the US dollar given the concerns about the Jokowi elect’s cabinet choices, his ability to garner a majority support in parliament and his commitment to deal with economic problems including fuel subsidies and nationalistic policies followed by the peso with 1.32% losses – the weakest level since May 2 despite improving tax collection in August and better-than-expected remittances.
The ringgit (MYR) fell 1.28% to close above 3.230 to test immediate resistance of 200 days moving average of 3.2430. Markets are having a split view leading to Bank Negara’s decision on its policy rate, the cross Singapore dollar/MYR rebounded from low 2.5311 on last Friday closing to above 2.550 and the one-month MYR volatility surged to above 8.130% – its highest volatility since late 2013. On the macro front, consumer prices rose 3.3% in August from 3.2% in the previous month. Price pressure remains elevated as the effect of the upward adjustment in administrative pricing rolled out by the Government since September 2013 still linger. Bank Negara kept the overnight policy rate (OPR) unchanged at 3.25%. According to the monetary policy committee (MPC), the current stance of monetary policy remains supportive of growth. Further adjustment to the degree of monetary accommodation may be taken depending on how new information will affect the assessment on the balance of risks.
US Treasuries (UST) sold off, with the five-year touching its highest in more than three years after the Fed raised its estimate of the target rate for overnight loans between banks for 2015. At the time of writing, the three-, five- and 10-year yields are 2-5 bps higher at 0.58%, 1.87% and 2.65%, respectively.
M’sian bond market
Local govvies endured a quiet week, short-working week and investors were on the sidelines waiting for the announcement of the monetary policy decision. Malaysian Government Securities (MGS) benchmarks rallied in late trading on OPR annoucement. We expect the momentum to continue given the tone of the MPC which could be interpreted as neutral.
As of Thursday’s close, yields on three-, five-, seven-, 10-, 15-, 20- and 30-year MGS settled at a respective 3.54%, 3.66%, 3.83%, 3.93%, 4.2%, 4.3% and 4.65%. The week saw RM2.7bil worth of trades with a daily average trading volume of RM888mil compared with last week’s RM925mil.
The private debt securities (PDS) market also saw light trading activity this week. Total trading volume for the week was at RM880mil, averaging at RM293mil daily, compared with last week’s RM897mil. Fifty-eight per cent of the trading volume was contributed by the GG/AAA segment and 42% by the AA segment.
In the GG/AAA segment, buying interest was seen for long tenured AAA papers. Aquasar Capital bonds maturing 2026-2029 saw yields down by 3-7 bps with a collective trading volume of RM100mil. TNB WE bonds maturing 2028-2030 also saw yields eased 3-29 bps to a yield range of 4.89%-5%. Names traded unchanged include Putrajaya Holdings ‘09/20 and Sarawak Hidro ‘10/28 at 4.2% and 4.7%, respectively.
Power and FI bonds were mostly traded in the AA-segment. Notable trade includes TF Varlik ‘06/19 garnered RM55mil worth of trades with closing yield spiked 14 bps to 5.73%. Among the power names, Malakoff Power ‘12/14 and Tanjung bin Power ‘08/20 eased 3 and 2 bps to 3.91% and 4.62%, respectively.
MYR IRS market
MYR Interest Rate Swap (IRS) rates came down by 1 bp across the curve despite the higher UST yields.
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