THE safe-haven dollar, pared losses during the week, closing lower by 0.21% at 96.73. The dollar received a catalyst mid-week after the Federal Reserve (Fed) delivered a bleak outlook during its Federal Open Market Committee (FOMC) meeting, downplaying a V-shaped recovery in the economy with FOMC members projecting real gross domestic product (GDP) to decline by 6.5% y/y in the fourth quarter of 2020 (Q4) (median estimate) before the economy rebounds by 5% in 2021.
Besides, the FOMC members expect unemployment rate to average at 9.3% in Q4 and 6.5% by end-2021; and core-inflation at 1.0% y/y at Q4 (2021: 1.5%). Nevertheless, the Fed maintained its monetary policy with its target rate of 0.00–0.25% as expected; and forecast its policy rate to stay at zero until 2022. It pledged to continue its asset purchase programme until the economy recovers from the coronavirus pandemic. In addition, the dollar received additional impetus towards the end of the week following renewed concerns that a second wave coronavirus infection could be taking hold in some states.
Amidst the global risk-off sentiment, Brent plunged 8.87% to US$38.55 per barrel. Apart from that, some selling pressure came after the EIA reported a 5.7 million increase in crude inventory for the week ending June 5 compared to a decline of 2.1 million in the previous week (cons: -1.7mil).
The euro pared gains, closing marginally higher by 0.06% to 1.13 as the risk-on mode falters. Separately, European Central Bank president Christine Lagarde this week signalled that the central bank is willing to play a more active role in responding to a critical ruling by Germany’s constitutional court over its monetary policy.
The pound weakened by 0.52% to 1.26 due to negative Brexit headlines. The fourth round of trade talks between the UK and the EU ended with little progress, despite Britain having only until the end of the month to request an extension to the transition period which is due to end after December 2020.
The yen rises to a one-month high – up 2.48% to 106.9 – due to diminishing expectations that the global economy would recover swiftly from the coronavirus pandemic. The demand for the yen further intensified following the renewed concern over the jump in new coronavirus infection.
The majority of the Asia ex-Japan currencies appreciated against the dollar with the baht coming in as the outperformer during the week – up 1.39% to 31.07. Meanwhile, the rupiah emerged as the underperformer of the week, depreciating 1.02% to 14,020 amidst its local bourse index recording a net foreign outflow of US$38mil. The ringgit appreciated by 0.49% to 4.25 as of Thursday. However, the ringgit witnessed a knee-jerk sell-off on Friday, trading at 4.27 at the time of writing after risk-averse sentiment permeated global markets.
US Treasuries market
The US Treasuries (UST) curve bull flattened, easing 2.9–12.4bps on the shorter end (two-year (2Y) to 5Y) while the longer end (10Y to 30Y) fell 20.6–24bps.
The bond buying came after FOMC members projected the Fed target rate between 0.00 and 0.25% until 2022; and rising fears of a second wave of virus infections in several US states. As at noon Friday, the 2-, 5-, 10- and 30-year benchmark UST yields stood at 0.20%, 0.32%, 0.67% and 1.40%, respectively.
Malaysian bond market
After the early week sell-off, bargain hunters reemerged in the local bond market. Flows were focused from the front to the belly part of the curve with MGS yields falling 6–14.5bps (3Y to 10Y).
Meanwhile, the 30Y MGS rose 10bps ahead of its huge auction size of RM5.5bil on Friday. The GII yields also eased 1–12bps across the curve with front to the belly side falling faster compared to the back-end papers. As at noon Friday, the 3-, 5-, 7-, 10-, 15-, 20- and 30Y benchmark MGS yields settled at 2.34%, 2.53%, 2.76%, 2.91%, 3.33%, 3.62% and 4.03%, respectively.
Activities in the govvies segment declined 29% w/w to RM15.5bil from last week’s RM21.8bil. The MGS segment shrank 33% w/w to RM8.2bil from RM12.3bil in the previous week. The GII was also reduced by 44% to RM3.8bil from RM6.7bil. Meanwhile, short-term bill (MTB/MITB) trading rose 26% w/w to RM3.5bil from RM2.8bil. Sukuk Perumahan Kerajaan (SPK) recorded RM50mil.
In the GG/AAA segment, Cagamas Bhd 2020–2023 tranches dominated the list with a total of RM600mil, trading between 2.34% and 2.78%. Meanwhile in the AA segment, some interest was seen in Kuala Lumpur Kepong Bhd 2022–2034 tranches, which gathered RM260mil at 2.87%–3.82.
Ringgit interest rate swap (IRS) market
The IRS fell 3.5–12bps across the curve. The three-month Klibor stood at 2.28%. Elsewhere, the 5Y CDS rose 6.4% w/w to 75.6bps.
Malaysian equity market
During the week (June 9–12, midday), the FBM KLCI retraced 19.90 points (pts) or 1.28% to 1,536.43 pts, in response to a major selloff in the US market on concerns over a potential second wave of Covid-19 infections, coupled with the US Fed’s forecast of a sluggish recovery, and hence Fed funds rate shall remain near-zero through 2022 (weighing down on the dollar and banks’ earnings outlook).
These eclipsed Malaysia’s transition to the recovery movement control order (RMCO) from the conditional MCO from June 10, coupled with the unveiling of the short-term Economic Recovery Plan (Penjana) by Prime Minister Tan Sri Muhyiddin Yassin on June 5.
Foreign investors remained net sellers in the local market. Thus far in June 2020 (up to June 11), foreign investors have sold a total of RM1.7bil worth of Malaysian equities, bringing the year-to-date (YTD) net outflow to RM15.0bil.
However, the selling was relatively well absorbed by local institutional and retail investors, with a participation rate of 48.0% (vs. 45.8% in May) and 38.2% (vs. 36.8% in May) respectively.
Meanwhile, as foreign investors lightened their positions, their participation rate fell to 13.8% (vs. 17.5% in May).
Similarly, foreign investors sold RM0.4bil worth of Malaysia Government Securities (MGS) in April 2020 (the latest available number), after peaking at RM12.5bil in March 2020. YTD, the net MGS outflow was RM16.7bil.
A buoyant market boosted Bursa Malaysia’s average daily value traded to RM6.1bil in June (vs. RM4.3bil in May) while turnover velocity surged to 94.0% (vs. 70.0% in May).
During the week, only two out of 13 sectors in Bursa Malaysia recorded gains.
The top-performing sector was Technology (+5.4%) as investors generally believe that a prolonged low interest rate environment is conducive to growth stocks.
Meanwhile, the worst-performing sector was Energy (-7.9%) on the back of lower oil prices amidst rising inventories and concerns over the reimposition of lockdowns that could lead to another collapse in demand (in the event of a second wave of Covid-19 infections), which has led to the extension of production cuts by Opec+ to July 2020.
In the coming week, investors will keep a close eye on:
(1) Malaysia’s April monthly labour statistics on June 15;
(2) China’s May Industrial Production Index on June 15;
(3) Bank of Japan monetary policy statement on June 16;
(4) US May core retail sales on June 16; and
(5) Malaysia’s Consumer Price Index on June 24.
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