CURRENCY markets were again driven by equities and commodities as a general risk off sentiment prevailed. Commodities, especially crude oil prices remained a focal point for markets.
The strength of crude prices proved short-lived with renewed weaknesses in oil associated with a slide in US equities and risk aversion came back to grip. Oil prices fell 2.7% this week to below US$40/barrel for the first time in the last seven years despite the latest EIA storage report that showed the biggest inventory draw in four months while the US dollar taking the brunt of the pain.
The CRB global commodity price index hit a 2002 low with further downward pressure from a weaker Chinese economy. China’s imports have slumped for 13 straight months, renewing concerns of spill-over effects into global economies. The close to 30% fall in US dollar oil prices since the start of the year presents a major deflationary impulse to the global economy.
The odds of a US interest rate hike next week have now increased to 80%. The rate hike is now largely expected and mostly priced in the US dollar traded mixed as markets reacting to a limited data calendar. For now, the European Central Bank’s monetary policy is priced into the currency movement and it will be some time yet until it will have to admit that its inflation outlook remains overly optimistic and it will have to consider revising it.
The yen gained 0.9% against the US dollar in reaction to large upward revision to third-quarter GDP from -0.8% to 1%, which came largely from an upgrade to business investment, hence reducing the chances that the Bank of Japan will introduces more monetary policy easing in the near term.
In Asia, markets have been on the US dollar buying mode with nervousness increases over the yuan. CNH spot touched a high of 6.517 in very thin conditions, challenging the August highs in reaction firstly to China’s suspension RQDII approval – a programme that started in November 2014 as it will reduce offshore liquidity and secondly to falling exports that declined by 6.8% - the fifth straight month of fall while imports dropped 8.7% – its 13th straight month of contraction. Leading the losses were the ringgit, the won and the rupiah. The won was down 0.9% against the US dollar while the rupiah fell 0.7% amid foreign selling of local equities.
The ringgit fell almost 1.2% against US dollar challenging the 50-day moving average of 4.2718 on continued selling of local equity, strengthening Singapore dollar/ringgit above 50-day moving average of 3.038, rising five-year CDS rate to 189.8 and plunging crude oil prices. Weaker industrial production of 4.2% in October added new pressure point to local currency. However, spread against one-month NDF rate eased from Monday’s 5.9 basis points to 0.1 basis points as the one-month US dollar/ringgit stabilising around 10.47% respectively.
US Treasury (UST) yields flattened as soft oil prices continued to underpin growth concerns.
Market players stayed on the sidelines waiting for the Fed’s comment on this disinflationary forces in the coming Federal Open Market Committee (FOMC)meeting. At Friday’s 11.00am pricing, the two-, five- and 10-year UST traded at 0.95%, 1.68% and 2.23%.
M’sian bond market
Trading activities in local govvies were much lower across the week in response to the weakening of the ringgit (due to declining oil prices). Investors’ “wait-and-see” strategy towards next week’s FOMC decision also resulted in the low trading activities. The week also saw the re-opening of 10-year Government Investment Issues ‘10/25, which is also the last tender for this year. The bonds garnered a bid-to-cover ratio of 1.822 times at an average yield of 4.514%.
Local govvies saw a trading volume of RM7.5bil, which translates into a daily average of RM1.9bil. This compares with the preceding week’s RM16.4bil, or an equivalent of RM3.3bil 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 3.44%, 3.79%, 4.17%, 4.29%, 4.55%, 4.62% and 4.79%.
In the secondary private debt securities market, we saw a higher volume in trading activities this week than last week. Total trading volume stood at RM1.6bil, averaging RM410million daily, compared with last week’s RM309mil. About 59% of the trading volume was contributed by the GG/AAA segment, 30% by the AA segment, with the remaining by the A segment.
In the GG/AAA segment, 2016 and 2018 tranche of Cagamas bonds saw yields traded 0-6 basis points lower to close at a range of 3.63%-4.2%, with a collective trading volume of RM452mil. The AAA rated Korea Development Bank ‘02/16 saw yield eased by 4 basis points to settle at 3.69% with RM110mil changed hands. Industrial Bank of Korea ‘02/17 also saw yield traded lower by 13 basis points to close at 3.94%, with a trading volume of RM80mil.
FI bonds were actively traded in the AA segment during the week. Notable trade is Public Bank ‘12/16, which saw the yield traded 1 basis point lower with RM72mil changed hands. Besides that, RHB Bank ‘11/17 also saw yield closed 9 basis points lower at 4.52% with a trading volume of RM20mil. On the other hand, MMC Corp ‘11/20 and ‘11/27 garnered a combined trading volume of RM80mil, with the yield settled at 5.2% and 5.91% respectively.
MYR IRS market
As at Friday’s 11.00am pricing, short-end of the IRS curve shifted higher marginally in response to the weakening ringgit and the pressure from a weaker China economy. Elsewhere, three-month KLIBOR increased 2 basis points to 3.81% this week.
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