Treasury Pulse - Forex, treasuries market, ringgit, equity market

Treasury Pulse 050621

Global Forex Market

WHILE the Dollar Index (DXY) was muted at the start of the week, firmer bids were seen towards the end of the week, closing at two weeks high of 90.51 or up 0.53% week-on-week (w-o-w). The broad strength in the dollar was boosted by inflation-linked economic data release and well-received Beige Book report.

Speedy vaccination rates and relaxed social distancing measures have started to show their effect when consumer-spending has picked up pace, notably in leisure travel and restaurant categories as reported in the Beige Book. Looking at the supply side, in general, businesses are seeing a “moderate” increase in economic activity.

Manufacturers noted an increase in their output for the past two months amid the lack of labour and raw materials, delaying their product delivery to the customers. The same problem also occurred in the construction sector.

In addition, solid economic data for May released yesterday has further augmented the strengthening of the dollar. Most of the indicators posted stronger actual data beating the forecast figure, for example, the ISM Manufacturing PMI for May was 61.2 versus the forecast at 60.9 (consensus 60.7 for previous period), ADP Employment shows that US employees hired around 978,000 workers vs forecast of 600,000 workers (654,000 consensus) and jobless claims have reduced quite significantly to 385,000 compared with forecast of 400,000 (405,000 consensus). While Markit Services PMI posted an actual of 70.4 vs forecast of 70.1 (64.7 consensus).

The euro which accounts for 57.6% of the dollar index, depreciated by 0.53% to 1.213, marking the weakest in 11 days. Despite better economic data release in the eurozone, it was overshadowed by the robust US economic data.

Investors partially took the sideline ahead of the European Central Bank (ECB) on June 10. Data released during the week include May EU Markit Manufacturing PMI, up 63.1 from 62.9 in April (consensus 62.8), May EU flash inflation grew 2.0% year-on-year (y-o-y versus 1.6% y-o-y in April (consensus: 1.9%), the highest since October 2018; April EU unemployment rate inched lower to 8.0% from 8.1% in March (consensus: 8.1%); and May EU Markit Services PMI, up 55.2 from 50.5 in April.

The pound was volatile, touching a three-year high of 1.42 levels before giving up its gains to 1.41 following the resurgence of the dollar’s strength. By end of the week, the pound fell 0.58% to 1.41. On a positive note, Prime Minister Johnson said the economy is on track to end restrictions on June 21.

Meanwhile, the final reading of the UK Manufacturing PMI release was still decent. It was revised slightly lower to 65.6 in May from a preliminary of 66.1 but still pointed to record growth in factory activity as output growth strengthened and new orders rose at the quickest pace in the near three-decade survey history. The May UK Markit Services PMI’s, on the other hand, jumped to 62.9 compared with 61.0 in April (consensus: 61.8). The yen weakened by 0.40% at 110.29, the weakest in eight weeks due to the rising US Treasruy yields amid the extension of state of emergencies to the end of May affected the Aichi, Fukuoka, Tokyo, Osaka, Hyogo, and Kyoto Prefectures.

Final Jibun Bank Manufacturing PMI eased to 53.0 in May 2021 compared with 53.6 in April, while the services PMI also shows the same pattern where the final figure for May contracted deeper to 46.5 from 49.5 in April.

The majority of the Asia ex-Japan (AxJ) currencies weakened against the dollar with the rupee came in as the underperformer in the region. It fell by 0.66% 72.91 due to the surge in crude oil prices.

The yuan depreciated by 0.55% to 6.40, the weakest since May 25 as Chinese policymakers announced an increase in foreign exchnage reserve requirements, from 5% to 7%, effective June 15. This will make it more expensive for banks to hold foreign currencies and the move signals PBoC’s unwillingness to have a steep appreciation in CNY.

The ringgit came in as the outperformer in the AxJ space, appreciating by 0.21% to 4.124, marking the strongest in three weeks. The firmer ringgit bids were supported by stronger crude oil prices added with the presence of foreign buying in the local financial market, which helped ease concerns of the two-week nationwide lockdown since June 1.

US Treasuries Market

Amid a short working week in the US market in conjunction with Memorial Day, the US Treasury curve rose 1-4bps. The closely-watched UST 10-year yields rose 3.1bps to 1.625%, the highest in two weeks. The light selling pressure came after a slew of inflation-linked data release came in stronger-than-expected, fuelling doubts on Fed’s transitory “inflation” narrative. This week, investors continue to see growing debates on a taper with Fed Harker said it was time to start thinking about discussing the time frame for scaling back the Fed’s US$120bil (RM495bil) per month bond-buying programme. As of noon Friday, the 2-, 5-, 10- and 30-year benchmark UST yields stood at 0.16%, 0.84%, 1.63% and 2.30%, respectively.

Malaysian Bond Market

The activity in the local bond market picked up with tight price action due to growing calls for further OPR cut as the economy was put under a lockdown. Nonetheless, the government, as expected followed through with a stimulus package (Pemerkasa Plus) worth RM40bil, which includes RM5bil direct fiscal injection.

Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz, later highlighted that the lockdown might impact growth and fiscal deficit target; which might be revised soon.

Separately, Moody’s reaffirmed Malaysia’s credit profile with the A3 rating level and expected the GDP to grow slightly above 5% after considering the nationwide lockdown and potential extension.

By end of the week, the MGS curve eased by 3-8 bps except for the 10-year MGS which rose 2.8bps to 3.23%. As at noon Friday, the 3-, 5-, 7-, 10-, 15-, 20- and 30-year benchmark MGS yields settled at 2.25%, 2.53%, 2.96%, 3.25%, 3.94%, 4.14% and 4.31%, respectively.

Ringgit Interest Rate Swap (IRS) Market

The IRS curve fell 2-6bps across the curve while the 3-month Klibor stood at 1.94%. Elsewhere, the five-year CDS rose 0.2% w-o-w to 45.9bps.

Malaysian Equity Market

During the week (May 28 to June 3), the FBM KLCI eased 3.33 points or 0.21% to 1,590.57 points, tracking the flattish Dow Jones Industrial Average (+0.33%) but underperforming the MSCI Emerging Markets Index (+2.16%). Globally, investors weighed the prospect of the Fed scaling back on its bond-buying programme against a backdrop of strong economic data and rising inflationary pressures.

Also keeping investors in check, were geo-political tensions arising from Russia’s decision to remove the dollar from its National Wellbeing Fund and Biden’s plan to widen a US ban on investment in Chinese companies linked to the military and surveillance technology.

Foreign investors bought RM210.6mil worth of Malaysian equities during the week but this did little to reverse the year-to-date net outflow that still stood at RM3.0bil.

Local institutional and retail investors continued to dominate the market with a participation rate of 46.5% and 40.3% in June respectively (compared with 42.4% and 38.1% in May respectively). Foreign investors remained passive with a participation rate of 13.2% in June (compared with 19.5% in May).

Meanwhile, foreign investors piled into Malaysia Government Securities (MGS) for a 12th straight month with a net inflow of RM4.7bil in April 2021 (vs RM1.5bil in March 2021).

Equity trading activities improved with an average daily value traded of RM4.3bil in June (vs RM3.9bil in May). Similarly, turnover velocity increased to 59.0% in June (vs 54.2% in May).

During the week, seven out of 13 sectors in Bursa Malaysia ended in the positive territory. The best performing sector was construction (+2.4%) as investors took comfort that the building of critical public infrastructure projects was allowed to continue during the lockdown. The worst performing sector was energy (-2.5%), weighed down by the steep sell-off of a key oil and gas counter on audit issues.

In the coming week, investors will keep a close eye on:> Eurozone GDP (Q1) on June 8;

> Malaysia labour statistics (April) on June 9;

> ECB interest rate decision on June10;

> US CPI (May) on June 10;

> Malaysia IPI (April) on June 11.

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