Treasury Pulse

  • Business
  • Saturday, 13 Jul 2019

Global Forex Market

THE dollar started the week on a strong footing due to the better-than-expected labour market data which tapered expectations for a 50bps rate cut in July’s FOMC meeting. However, the dollar’s strength was short-lived after both the minutes of the FOMC meeting and the Fed Powell’s congressional testimony took an outright dovish turn, reigniting expectations of a 50bps cut in July. During his testimony, Powell signalled his willingness to cut interest rates by the end of the month, citing “uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the US economic outlook”, and there’s “a risk that weak inflation will be even more persistent than we currently anticipate”.

Nevertheless, the dollar remained muted despite core inflation data posting a strong reading of 0.3% month-on-month (m-o-m) in June, the largest increase since January 2018 compared with 0.1% m-o-m in May, and beating market expectations of 0.1% as the market continued to bet on July’s rate cut. By the end of the week, the dollar depreciated by 0.24% to 97.05.

In the commodity space, Brent crude oil rose 3.6% to US$66.52/bbl partly after the EIA crude oil stockpiles announced a drastic drop of 9.5 million barrels for the week ending July 5 from a smaller supply cut of 1.09 million barrels in the week prior, and as major producers evacuated their rigs in the Gulf of Mexico ahead of an expected storm.

On another note, Opec forecast a slower global oil demand in 2020 to 29.27 million bpd, down 1.34 million bpd this year.

As Opec crude rivals pump more, this will point to the commodity surplus albeit the full-blown progress by the cartel to restrain supplies.

The euro appreciated by 0.26% to 1.125 largely underpinned by a weaker dollar.

However, the broad sentiment in the euro remains weak following a slew of negative news that include: (1) the European Commission trimming the eurozone growth forecast for 2020 to 1.4% from 1.5% previously while maintaining 2019’s growth at 1.2%, citing uncertainty over the US trade policy as it poses a major risk to the bloc; and (2) Deutsche Bank’s announcement on cutting 18,000 jobs as part of a radical reorganisation.

The pound managed to recover losses, closing at 1.252, the same as in the week prior. It was seen under pressure earlier this week due to rising fears over the strength of the British economy as a no-deal Brexit looms.

However, the pound recovered towards the end of the week largely supported by a weaker dollar, added with the release of BoE’s Financial Stability Report which suggests that UK banks hold enough capital to cope with the simultaneous risks of a no-deal Brexit and a global trade war.

The Japanese yen closed marginally weaker by 0.03% to 108.5 owing to lack of demand for safe haven assets. The yen was also partly weighed down by weaker economic release which includes: (1) May machinery orders recording a decline of 3.7% year-on-year (y-o-y) from a gain of 2.5% y-o-y in April; (2) May wage growth continuing to post a negative growth of 0.2% y-o-y from -0.3% y-o-y in April; and (3) June machine tools order contracting by 38.0% y-o-y compared with -27.3% y-o-y in May.

The majority of Asian ex-Japan currencies strengthened against the dollar save for the Philippines peso, Indian rupee and South Korean won. The Indian rupee weakened marginally by 0.03% to 68.4 underpinned by sustained foreign selling in the equity market, recording an outflow of US$310mil for the week. In contrast, the Singapore dollar appreciated by 0.18% to 1.357 amid 2Q2019 GDP estimate slowing down significantly to 0.1% y-o-y from 1.1% y-o-y in 1Q2019.

The Malaysian ringgit came in as the best performer among its Asian ex-Japan peers, closing higher by 0.49% at 4.115 after the dollar’s strength tapered amid Bank Negara keeping its benchmark interest rates unchanged at 3.00%, in line with expectations. The FBM KLCI fell 0.2% to 1,677 but it still recorded a net foreign inflow of RM214mil during the week.

US Treasuries (UST) Market

The UST curve bear steepened with the long end part of the curve rising 9–13bps after both the labour market and inflation data came in better than expected. While the headline inflation rose at the same pace as May’s by 0.1% m-o-m, the core inflation accelerated by 0.3% m-o-m in June: the largest increase since January 2018 following four straight monthly gains of 0.1%. Though both data tempered market expectations for a rate cut in July, the release of FOMC minutes and Powell’s congressional testimony which took an outright dovish turn managed to keep July rate cut expectations alive. As at Friday noon, the 2-, 5-, 10-, and 30-year benchmark UST yields stood at 1.85%, 1.88%, 2.12%, and 2.64%, respectively.

Malaysian Bond Market

The local bond market started the week with some profit-taking activities as expectations of the Fed delivering a large rate cut dwindled ahead of Powell’s testimony. However, the local bond yields rallied with investors beginning to reload their portfolios after Powell kept the rate cut expectations in July alive. The focus of the week was Bank Negara’s MPC meeting. As widely expected, it held the OPR rate unchanged at 3.00%.

Although the overall tone was less dovish, the central bank is still cautious on growth. Meanwhile, this week saw the 7Y GII auction; in which the RM3.5bil issuance, including private placement, gained a strong BTC of 2.874x.

As of Friday noon, the 3-, 5-, 7-, 10-, 15-, 20- and 30-year benchmark MGS yields settled at 3.29%, 3.43%, 3.55%, 3.62%, 3.80%, 4.00% and 4.29%, respectively.

The Markit iBoxx ABF Malaysia Bond Index, an index comprising the MGS, GII and GG, returned 0.12% in the week from July 5-11 as the index yield fell from 3.57% to 3.56%. In the same period, the ABF Malaysia Bond Index Fund, an ETF which tracks the index, returned 0.093% as the fund yield was unchanged at 3.62%. Month-to dae, the fund returned 0.406% versus the index’s return of 0.432%.

Flows for local govvies dropped 40% to RM13.8bil from last week’s RM23.0bil. Activities in the MGS shrank 31% w/w to RM9.4bil from RM13.4bil, accumulating 68% from the total volume traded. Meanwhile, interests in the GII contracted 55% to RM4.1bil from RM9.1bil, contributing 30% of the week’s flows. These were followed by the PDS’ performance that saw bearish flows, falling 3% to RM3.3bil from last week’s RM3.4bil with the GG/AAA segment occupying 64%; AA 32% and others 4%.

Flows were focused on the GG/AAA segment that saw DanaInfra Nasional Bhd’s 2024–2049 tranches topping the list with RM695mil traded between 3.500% and 4.371%. Next were Lembaga Pembiayaan Perumahan Sektor Awam (LPPSA) 2024–2036 papers which gathered RM305mil with yields closing 3.516%–3.028%.

Meanwhile in the AA segment, Sunway Treasury Sukuk Sdn Bhd 2022 issuances accumulated RM340mil over the week, changing hands between 4.151% and 4.153%. Besides, WCT Holdings Bhd 2020–2026 tranches traded at 4.386%–5.301% amounting to RM108.9mil.

MYR Interest Rate Swap (IRS) Market

The IRS curve flattened this week with the front end rising 0.5bps while the belly to back fell 1.5–2.0bps. Besides, the five-year IRS was seen crossing below the three-month Klibor’s 3.46% by 0.1bps. Elsewhere, the 5-year CDS rose 1.5% to 51.13bps.

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