THE dollar witnessed a sell-off mid-week after the Fed turned rather dovish during its FOMC meeting — tweaking its dot plot projection to zero hike for 2019 from two hikes back in December 2018, signalling the end of quantitative tightening (QT).
The Fed also altered its official projection for major economic data in 2019 — GDP slashed to 2.1% (prevous: 2.3%); PCE (Fed’s preferred inflation gauge) revised downwardly to 1.8% from 1.9%; and unemployment rate revised to 3.7% from the earlier projection of 3.5%. However, the dollar pared losses by the end of the week owing to Brexit-related noises as well as the upbeat economic figures released this week such as initial jobless claims which edged down to 221,000 from 230,000 a week earlier; and the Philadelphia Fed manufacturing index in March rising to 13.7 from -4.1 the previous month (consensus: +4.5).
On a separate note, US-China trade tensions re-emerged after President Trump suggested that trade tariffs would continue for a “substantial period” to ensure that China kept its terms of the agreement. By the end of the week, the dollar fell 0.03% to 96.5.
For the commodity market, Brent crude oil rose 0.47% to US$67.70/bbl, posting a year-to-date (YTD) high as Opec reaffirmed its commitment on the supply cut for at least 1H2019 with the next decisive meeting scheduled on June 2019 which will determine the production target for rest of the year. Furthermore, the unexpected drawdown from the EIA also underpinned the price. The US inventory was lower by 9.59mil barrels for the week ended March 15, beating the market expectation of a 0.07mil increase.
The euro edged up 0.33% to 1.137 against the weaker dollar amid a persisting Brexit uncertainty. Meanwhile, economic release for the week includes EU economic sentiment coming in better than expected in March at -2.5 from -16.6 in February (cons: -11); 4Q2018 wage growth up 2.3% y-o-y, same rate as 3Q2018; and trade surplus narrowing from ?17bil to ?1.5bil in January, and defied the consensus of -?8bil.
The pound was weighed down by the Brexit saga, losing 1.12% to 1.311 as the House speaker blocked Prime Minister Theresa May’s plan of a third “meaningful” vote ahead of the EC Council meeting at the beginning of the week. ‘
The House speaker required a “substantially” different deal from the first two times which were voted down. Moreover, May’s request to extend the Brexit deadline from March 29 to June 30 has been rejected by the EU as it insisted that there would be no extension beyond May 22, the date of the European election. With no deal being agreed to and the extension request rejected, it intensified the possibility of a disorderly Brexit which pushed the sterling down by 0.7% in a day. However, an unconditional extension offer to 12 April from the bloc kept the sterling afloat and also gave time to the UK parliament to work out what to do. In the meantime, Bank of England unanimously decided to leave its policy rate unchanged at 0.75%.
The yen appreciated by 0.55% to 110.8 largely on the back of a weaker dollar, overshadowing the release of Bank of Japan’s (BoJ) meeting minutes which were as deemed rather dovish. The meeting minutes highlighted most BoJ members agree it was appropriate to maintain the BoJ’s current stimulus programme. Meanwhile, economic release for the week were slightly disappointing i.e. February exports came in at -1.2% y-o-y from -8.4% y-o-y in January (cons: -0.9%); core inflation slowed down to 0.7% y-o-y from 0.8% y-o-y in January; and Nikkei Manufacturing PMI est stayed flat at 48.9 points in March.
The majority of Asia ex-Japan currencies strengthened against the greenback with the rupiah emerging as the best performer, up 0.7% to 14,140 amid Bank Indonesia keeping its interest rates unchanged at 6%. The won and yuan followed suit, posting a gain of 0.4% to 1,127 and 0.21% to 6.69, respectively. However, the Indian rupee weakened by 0.44% to 68.8 despite a continuous foreign inflow of US$1.3bil into its equity market.
The ringgit appreciated firmly by 0.38% to 4.061 largely underpinned by the weaker dollar. Besides, the ringgit was partly supported by foreign flows, recording a net inflow of RM90mil. However, the KLCI dropped 1.6% to 1,664 by the end of the week. On the data front, inflation print came in at -0.4% y-o-y in February from -0.7% y-o-y in January.
US Treasuries (UST) Market
Treasury yields saw a broad rally following the Fed’s dovish statement. While the Fed kept policy rates unchanged at 2.25%–2.50%, it signalled no hike for 2019 and just one in 2020, according to its new dot plot projection.
The Fed also indicated an end to its balance sheet runoff by September. The policymaker also downwardly revised the US growth rate and PCE to 2.1% and 1.8% from 2.3% and 1.9%, respectively. Resultantly, UST10-year dropped 8.6bps, touching a 12-month low of around the 2.51% level while the spread between the UST10-year and 3-month note narrowed to 7.9bps. As at Friday, the 2-, 5-, 10-and 30-year benchmark UST yields stood at 2.40%, 2.33%, 2.53%, and 2.96% respectively.Malaysian Bond MarketThe local bond market rallied as yields eased 3–6bps particularly from the belly to the back-end of the curve. It was mainly due to a dovish US Fed which reinforced the markets’ view for an OPR cut by BNM later this year. Nonetheless, there was also the reopening of the 30Y MGS 07/48 with a size of RM4.0bil which included a RM2bil private placement. It gathered a rather decent BTC of 1.72x with a high/low spread of 7.9bps between 4.629% and 4.550% while averaging at 4.591%. As at Friday afternoon, the 3-, 5- ,7- ,10- ,15- ,20- and 30-year benchmark MGS yields settled at 3.41%, 3.57%, 3.76%, 3.81%, 4.16%, 4.35% and 4.61% respectively.
Local govvies experienced tepid flows as total volume during the week was reduced to RM15.9bil from RM23.2bil in the week prior. Flows to the MGS slid 24.5% w/w to RM8.1bil from RM10.7bil while in the GII segment, trading activities dropped 39.8% w/w to RM7.38bil versus RM12.3bil in the week prior. However, interest in treasury bills was seen picking up by 81.0% to RM380.0mil from RM210.0mil in the prior week.
In the GG/AAA segment, Prasarana Malaysia Bhd ‘21–30 tranches traded between 3.811% and 4.270% on top of RM375mil changing hands. Next, Perbadanan Tabung Pendidikan Tinggi Nasional (PTPTN) 2032–2039 tranches topped the list with RM350mil changing hands at 4.049%–4.440%. These were followed by Danainfra Nasional Bhd ’21–31 IMTN papers with yields between 3.810% and 4.101% on the back of a RM200mil volume.
Meanwhile in the AA segment, RHB Bank Bhd ’07/24 papers topped the list with RM70mil changing hands at 4.077%. Also, Anih Bhd 2024–2029 tranches settled at 4.437%–4.638% on top of RM64mil. Besides, UEM SUNRISE BHD 2020–2025 tranches saw RM57bil flow through 4.425%–4.682%.
Ringgit Interest Rate Swap (IRS) Market The IRS curve was seen easing lower across the curve by 1-2bps. As at Friday’s noon pricing, the 3-month KLIBOR stood at 3.69%. Elsewhere, the 5-year CDS rose 10.5% to 68.4.