Global forex market

by **Cals** Mon 11 Nov 2013, 00:09

Published: Saturday November 9, 2013 MYT 12:00:00 AM
Updated: Saturday November 9, 2013 MYT 7:40:15 AM
Global forex market

RISK is back on as the US dollar index trails off after hitting a peak of 80.706 on Tuesday. There were market talks that the Fed has adjusted its forward guidance rate for unemployment to 6.5% as a new benchmark before it considers adjusting interest rates.
The news stems from research papers by Fed economists and until evidence of Fedtapering balances monetary policy, the US dollar weakness will likely be maintained. The main headline take-away was that under a fully credible Fed that can tie its own hands even as inflation overshoots, the “optimal” fund path has rates lift-off into possibly late 2016. “Lower for longer” now implies higher later, or in other words “guidance” is more about the slope of near-term US rates path rather than the medium-term outlook for yields.
As a result, the euro eked out a gain and recovered from a Monday’s fall to six-week lows against the greenback. The euro bearishness may have run its course as the stakes have been raised for looser policy action after downbeat eurozone numbers on jobs and inflation fanned renewed concerns about the region’s economic health. Those worries were reinforced as the 0.6% decline in euro retail sales in September exceeded market forecasts of a 0.4% fall, setting the stage for lackluster third-quarter growth and foreshadow a rate cut in the months ahead.
The euro volatility continued relinquishing the gains as the European Commissiondowngraded GDP forecasts for 2014 while lifting unemployment expectations. The yen has found another weight in US Treasury yields which have crept higher as some investors have brought forward the timetable for the Fed to unwind some of its monetary stimulus.
Asian currencies continued to see wider North-South divide. The South Korean won and Taiwanese dollar led gainers with 0.26% and 0.18% appreciation, respectively against the US dollar, despite profit-taking activity in the equity market. The rupee and rupiah fell most by 1.07% and 0.46%, respectively, on weaker economic backdrop as a result of risk of rising current account deficit and political uncertainty. Indonesia’s real GDP growth eased to 5.6% year-on-year (y-o-y) in the third quarter (Q3), from a revised +5.8% in Q2. This marked the fifth consecutive quarter of slowing growth, and the weakest since the 2009.
The ringgit (MYR) continued to trade on a stable plane with a depreciation bias into the second week of post-Budget 2014. The rate of depreciation, however, has softened with strong support at 3.1717 against the US dollar as equity players took profits, softer Malaysian Government Securities (MGS) demand, rumours of poor liquidity onshore on a break to observe Awal Muharram on Tuesday and higher one-year US/yuan NDF of around 6.1580.
Narrowing yield differentials between the US Treasuries (UST) and domestic bonds softened demand for the latter as well. In term of news-flow, it was reported thatIskandar Malaysia recorded cumulative total investments of RM129.42bil from 2006 to October 2013. Of the total, 44% or RM56.32bil represented investments that had been realised.
Bank Negara decided to keep its policy rate steady at 3% with a view that (there may be) rising inflation in the remainder of the year and into 2014.
US Treasuries (UST) rallied following the surprise decision by the European Central Bank to reduce its benchmark interest rate. Markets also shrugged off the stronger than expected US GDP data. At the point of writing, the two-, five- and 10-year yields eased 2-6 bps week-on-week to settle at 0.31%, 1.37% and 2.62% respectively.
The local govvies had a relatively quiet trading week as local players were in a profit-taking mode in the absence of fresh leads. The range bound patterns seen in UST and currency pairs did not provide any catalyst for additional positioning. Overall, sentiments remained calm amid market expectations that the OPR to stay unchanged at 3%.
Benchmarks MGS yields traded higher by 6-11 bps, except for seven-year MGS which eased 6 bps. As of Thursday’s close, yields on three-, five-, seven- and 10-year MGS stood at a respective 3.15%, 3.47%, 3.47% and 3.7%. The longer end of the benchmark curve was not traded. The week saw RM4.2bil worth of trades exchanging hands with a daily average trading volume of RM1.4bil compared with last week’s RM1.9bil.
On the private debt securities (PDS) market, investors’ interest were skewed to the GG/AAA segment with total trading volume of RM1.8bil compared with RM2.6bil previously. 58% of the trading volume was contributed by the GG/AAA segment and 42% by the AA segment. There were no trades seen in the single A segment. Daily average trade volume was at RM606mil from RM511mil.
In the GG/AAA segment, newly issued Cagamas bonds maturing 2014-2023 still found favour in the market, which garnered a total trading volume of RM195mil. Bank Pembangunan ‘04/15 was seen actively traded during the week with RM190mil worth of trades exchanging hands, yield eased 7 bps from its last traded level earlier last month to close at 3.35%. Strong buying interest was seen in the AAA-rated Aman Sukuk maturing 2016-2021 with a collective trading volume of RM135mil, yields eased 1-7 bps.
Along the AA curve, secondary activities were concentrated on power names which took up approximately 34% of total trades. SEB bonds maturing 2016-2026 garnered collective trading volume of RM120mil with yields ending flattish. It was a relatively quiet trading week in the bank issuance segment, which notably saw OCBC ‘11/15 traded unchanged at 4% with RM38mil changing hands. Elsewhere, F&N Capital‘09/18 saw yield eased 15 bps to close at 4.15% with RM120mil worth of trades done.
The interest rate swap (IRS) was higher by 1-2 bps on the back of good data from the United States.

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