Global Foreign Exchange Market

RISK appetite was higher at the start of the week as markets responded to Italy's new fiscal package. Investors remained cautious ahead of two major events for the week, the European Central Bank (ECB) meeting and the European summit in Brussels at the end of the week, where EU officials are supposed to present a grand scheme to finally “complete” the sovereign debt crisis response.

Risk sentiment took a hit at the start of the week after S&P's caution to put 15 of the 17 EU nations on credit watch with negative implications and placed the AAA long-term credit rating on the European Financial Stability Facility (EFSF) on credit watch with negative implications. Pessimism spread in the market after the S&P's announcement, yet markets recovered on news that European leaders are expected to launch the European Stability Mechanism (ESM) in mid-2012, where this mechanism will run alongside with the EFSF, in attempts to double the firepower of the European rescue fund. The ECB cut its Refi rate by 25bps to 1.00% in line with expectations and also announced a number of liquidity easing measures. Risk appetite was given a lift by ECB expected rate cut but then reversed after ECB president Mario Draghi resisted from signalling expansion of the bond purchase programme.

The USD rallied, supported by its safe haven status after the ECB said it will not be expanding its bond buying programme. The US dollar index climbed 0.32% during the week. The Aussie dollar (AUD) was the worst performing currencies as it dropped 0.79% to 1.0121. The euro (EUR) plunged 0.39% to 1.3332. The yen (JPY) and sterling pound (GBP) were the top performer this week with a fractional increased of just 0.28% and 0.08% to 77.71 and 1.5626 respectively against a stronger USD.

During the week Asian currencies were generally weaker in the uncertain environment with the Bloomberg-JPMorgan Asia Dollar index declined by 0.63% to 115.30. The ringgit (MYR) weakened 1.02% to 3.1545 while SGD slide 1.0% to 1.29.

Two regional central banks met during the week. Bank Indonesia and Bank of Korea kept their benchmark interest rate unchanged at 6.0% and 3.0% respectively.

Data from the region saw China's CPI inflation dropped to 4.2% y/y in November, compared with 5.5% previously while PPI inflation declined to a 23-month low, at 2.7% y/y in November, down substantially from October's 5.0%. The HSBC Purchasing Managers' Index for China's services sector fell to 52.5 from 54.1 in November. Elsewhere, South Korea's GDP added 0.8% in 3Q 2011. Philippines and Taiwan annual inflation eased to 4.8% and 1.01% respectively in November. India's service sector activity recovered to 53.2 in November after two months of contraction.

With the ECB out of the way, the market focus will now shift to the EU Summit. Reports are emerging that Germany rejects common Eurozone debt issuance and rejects running the EFSF and ESM simultaneously. If the EU summit does not surprise positively it will be negative for the markets next week. As such, we expect USD/MYR to trade within the range of 3.1250 to 3.1750.

US Treasuries (UST) Market

At time of writing, UST yields for 2-, 5-, 10-year traded 3bps to 10bps lower on weekly basis, to close at 0.218%, 0.836% and 1.972% respectively.

Malaysian Bond Market

Local govvies started the week on a rather lackluster trading mode, with players preferring to stay on the sideline ahead of GII reopening details and a slew of local economic data releases. On the macro front, industrial production eased to 2.8% y/y in October, after rising by a revised 3.0% in September amid slowing global demand but however came in above market consensus for a 1.6% gain. On a related note, manufacturing sales cooled to 11.4% y/y in October after having gained 16.4% back in September.

Meanwhile, buying momentum picked up by mid-week. As at Thursday's close, benchmark MGS closed generally lower from last Friday's levels with the 3-, 5-, 10- and 15-year yields falling by between 1 bp and 6 bps to 3.02%, 3.23%, 3.69% and 3.93% respectively. The yield on benchmark MGS 09/18, on the other hand, climbed one bp to 3.55% while the 20-year benchmark MGS up 3bps to 4.12%. Overall, RM11.7bil trades were recorded in the MGS/GII market with daily average trading volume higher at RM2.9bil compared to RM2.7bil in the previous week.

The issue size for the upcoming 3-year GII reopening was announced at RM3.0bil, in line with market expectations. This brings total gross MGS/GII issuances for 2011to RM90.2bil worth.

Thinner trading volumes were reported in the PDS space. RM2.0bil trades were recorded with daily average trading volume of RM491mil, only marginally lower than the RM566mil in the previous week. The GG/AAA and AA segments contributed 52% and 46% of trades respectively while the remaining came from the single-A segment.

In the GG/AAA segment, notable trades were seen on Khazanah Nasional bonds maturing in 2018, which generated RM200mil in trades. The bonds closed relatively unchanged, last changing hands at 3.79%.

Meanwhile, ADCB Finance 09/15 was last done at 4.20% with RM101mil in transactions.

In the AA segment, Binariang GSM was actively traded during the week with RM170mil of papers maturing 2014-2016 done at a range of 4.10% to 4.35%. Recently, issued DRB-HICOM bonds made their debut in the secondary market, with RM70mil done for its papers maturing 11/18s at 4.60% level.

MYR Interest Rate Swap (IRS) Market

MYR IRS rates fell during the week ahead of the EU summit as weaker economic data from the region and uncertainty over the European debt situation weighed on rates. The rates ended the week 1-4 bps lower.

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+1.. 419 ; looks like with bond yield lower , we might see risk on next week