ALL eyes were on China as the yuan has depreciated by a cumulative 4% against the US dollar.
Global markets remained uncertain as China announced to change its exchange rate regime on Aug 11. As a result, the daily fixing rose sharply to 6.2298 against the US dollar on the day – 1.9% higher than the previous fixing and there were talks that it could potentially stand in the way of the Federal Reserve raising interest rates.
China central bank said its foreign exchange regime has now become more market-oriented and it is good for the exchange rate’s long-term stability. He commented that market volatility brought by the recent change in the setting mechanism of the yuan fix rate would be limited and the changes made are positive news for the internationalisation of the yuan. The central bank said it had no intention to allow the yuan to continue depreciating, and its current level is in-line with economic fundamentals.
Responding to this, the US dollar has been shoved around but cooler market sentiment later in the week, allowed it to stabilise above one-month lows. Helping to keep the door propped open to a Fed rate hike this year, retail sales topped forecasts with a 0.6% rise in July.
The euro squandered a one-month high on the back of still elevated worries about China that led players to unload the yuan and buy the euro. A near certainty that Greece would soon get its hands on a third bailout also helped the euro.
The yen traded tightly within 123-125.5 band despite talk of possible monetary easing in Japan following the devaluation of the yuan. Japan said the yuan devaluation effects can be offset by monetary easing in the country. The Nikkei resumed declines as oil’s slump gathered momentum.
Asian currencies ended broadly weaker against the US dollar in response to China’s new exchange rate regime. China has rocked the boat to a degree that investing community is asking question if this is the beginning of another Asian crisis. Leading the pack of losers were the ringgit, rupee and rupiah. The rupee breached 65 handle with a weekly loss of 1.9% against the US dollar as policy rate cut odds rise on slowing inflation and selling in equity markets. The rupiah traded above 13700 as the currency lost 1.5% against US dollar despite the revamp of President Jokowi’s economic team in a cabinet reshuffle and the buying back government bond since mid-week.
The ringgit fell 2.5% against the US dollar to become the top loser among Asian currencies. It traded at a high of 4.120 amid the depreciation pressure of the yuan, falling commodity prices, record high cross Singapore dollar/ringgit of 2.9346 and sharp sell down in local equity markets. The one-month volatility also touched a record high of 14.635% on Thursday, compared with historical average of 7.8% as the one-month NDF rate tested a high of 4.1450. Better-than-expected second-quarter real GDP growth of 4.9% and current account surplus of RM7.6bil (from target of RM6.1bil), however, failed to keep markets on the optimistic side of the equation.
China’s move to depreciate its currency put doubt on Fed’s interest hike in September, which subsequently ignored in the later part of the week. At Friday’s 11.00am pricing, the two-, five- and 10-year US Treasuries (UST) traded at 0.71%, 1.56% and 2.17%.
Malaysian bond market
Trading activities in local govvies were heavier this week. Most local govvies were under selling pressure as the ringgit broke its psychological level of RM4 against the US dollar. The week saw the re-opening of five-year MGS ‘10/20 which garnered a bid-to-cover ratio of 1.742 times at an average yield of 3.899%. Local govvies saw RM13.8bil trading volume, translating into daily average of RM3.4bil . This was higher compared with the preceding week’s trading value of RM9.7bil, an equivalent of RM1.9bil daily. At Friday’s 11.00am pricing, the three-, five-, seven-, 10-, 15-, 20- and 30-year benchmark Malaysian Government Securities yields settled at a respective 3.53%, 4%, 4.15%, 4.23%, 4.42%, 4.48% and 4.8%.
In the secondary private debt securities (PDS) market, we saw a similar volume in trading activities this week compared with last week. Total trading volume for the week stood at RM1.2bil, averaging RM299mil daily compared with last week’s RM298mil. About 59% of the trading volume was contributed by the GG/AAA segment and 41% by the AA segment.
In the GG/AAA segment, 2019-2030 tranches Prasarana Malaysia Bhd bonds increased 0-6 basis points to close at the range of 3.92% to 4.6% with a collective trading volume of RM70mil. Pengurusan Air SPV Bhd ‘06/18 and ‘11/20 remained unchanged at 3.88% and 4.07% with RM85mil done. The AAA rated 2016-2020 Putrajaya Holdings Sdn Bhd bonds saw yield declining 1-8 basis points to settle at 3.72%-4.15% with RM30mil changed hands.
Trading of the AA segment were higher compared with the preceding week. Bright Focus Bhd ‘01/23 and ‘01/31 increased 1 basis point to close at 4.82% and 5.88% whereas ‘01/30 remained unchanged at 5.69% with RM48mil traded. IJM Corp Bhd ‘10/15 saw yield remained unchanged at 3.76% with a trading volume of RM100mil. 2018-2024 YTL Power International Bhd bonds traded at mixed to close at 4.27%-4.73% with a total of RM85mil done.
Ringgit IRS market
As at Friday’s 11.00am pricing, the interest rate swap (IRS) curve shifted marginally upward and the three-month KLIBOR remained steady at 3.69%.
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