Treasury Pulse – The Star Online – The Star Online

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Global Foreign Exchange Market

US dollar remained in a bullish mood, supported by bullish equity with the Dow and S&P 500 hitting new all-time highs.

The equity tally is now up to four consecutive days of climb with consistent closes at near-three year highs and the US dollar, as measured by the DXY index, appreciated above 83.494, the high seen on April 4. Having said that, the US dollar bulls are mindful of the volatility in bond markets from the weak yen and expectations for the Fed to taper asset purchases.

On the macro front, the momentum stayed bearish with the industrial production declined in April by the most in eight months. Capacity utilisation fell to 77.8%. The Empire manufacturing survey dropped to 1.43 in May from 3.05 in April.

The US dollar lifted to a six week high against the euro on Wednesday after the unexpectedly large contraction in the eurozone growth. The euro-zone economy contracted for the sixth consecutive quarter with limited prospect of a sustainable recovery in the course of this year.

The macro picture looked equally grim after figures showed the eurozone economy shrank by 0.2% in the first quarter of this year with the Italian economy also contracting by 0.5% and France by 0.2%.

Germany has once again been left to fly the flag for the 17-nation bloc having recorded modest growth over the first quarter of 0.1%. The implementation of austerity has shown considerable progress for lowering excessive debt loads, but it has come at the expense of a regional recession.

And in the case of Japanese yen, it remained sticky within the tight 101.1-102.3 band led by the rangy US dollar and the repatriation flow coming out from the Japanese community.

However, Japanese Prime Minister Shinzo Abe said that he was closely watching the Japanese government bond (JGB) market.

The 2-year JGB yield rose sharply last month after the Bank of Japan‘s aggressive monetary policy measures on April 4 while the 10-year JGB yield was steady until this month, when it trailed its US counterpart higher.

The stimulus effects of the government’s supplementary budget are widely expected to work through the economy from 2Q onwards. As corporate profits increase further alongside the yen weakens, exporters will have the scope to lower contract prices in the international market to boost their price competitiveness.

Strong US dollar sentiment and partly of higher fixing of Chinese yuan (CNY) drove Asian currencies to shelter with Singaporean dollar down 0.3%, followed by Taiwanese dollar and Korean won of 0.2%. China’s April new yuan loans and M2 money supply along with industrial production and fixed asset investment were a tad lower than expectations. Premier Li Keqiang has poured cold water on further stimulus to prop up the economy, highlighting risks that could be created with too much reliance on government-led investment. We noted that USD/CNY trades have been volatile in recent days with USD/CNH trading at a larger premium to USD/CNY.

The ringgit made no exception this trend with bearish momentum, hovering around the upper band of 2.960-3.050 range with some profit taking activity seen on local government bond market after yields traded at the lowest levels for the year.

On the macro front, Malaysia reported quarter one real GDP growth of 4.1% from an upwardly revised 6.5% in 4Q2012 on the back of contraction in net exports. In turn, the current account surplus in the balance of payments dropped by 62.2% to RM8.7bil in the 1Q, after recording a higher surplus of RM22.9bil in the 4Q due to smaller surplus in the merchandise trade account as well as a bigger deficit in the services account.

The financial account, on the other hand, swung back to register an inflow of RM1.0bnil in the 1Q, a reversal from an outflow of RM10.3bil in the 4Q respectively. However, the leading index rose 2.8% yoy in March compared to +1.0% in February indicating rising likelihood of improving prospect in the second half of the year.

US Treasuries (UST) Market

At the time of writing, yields on 2-, 5- and 10-year notes were seen settling at 0.23%, 0.78% and 1.88% respectively.

Malaysian Bond Market

During the week, local govvies rallied mostly along the belly to the long-end of the curve. As of Thursday’s close, benchmark MGS yields on 7-, 10-, 15- and 20-year settled lower at 3.09%, 3.05%, 3.44% and 3.56% respectively. Meanwhile, yields for 3- and 5-year traded higher, closing at 2.95% and 3.05% respectively. About RM18.1bil worth of trades transacted with daily average trading volume of RM4.5bil compared to last week’s average of RM7.5bil.

Moving into the local PDS space, total trading volume amounted to RM3.8bil, of which 67% came from the GG/AAA, 32% from the AA segments and the remaining trades from the single A segment. Daily average trade volume was slightly lower at RM943mil compared to the RM966mil average seen in the prior week.

In the GG/AAA segment, active trading continued to be seen on PLUS bonds maturing 2020-2038 which garnered a collective trading volume of RM530mil with yields easing 2-12 bps. Other notable trades seen include GG names such as 1MDB 05/39 which was dealt 5 bps higher at 4.50% with trading volume of RM300mil and Khazanah bonds maturing 2016-2024 which saw yields closing in the range of 3.32% to 3.77% with total trading volume of RM255mil.

In the AA band, secondary activities were concentrated on financial names. Maybank 05/19 garnered volume of RM115mil with yield falling 4 bps to 4.06%. Elsewhere, Imtiaz Sukuk 11/15 and 11/17 generated combined trading volume of RM110mil, with yields changing hands at 3.70% and 3.90% respectively.

MYR Interest Rate Swap (IRS) Market

MYR IRS rates traded significantly lower during the week as the first quarter Malaysian GDP growth rate was much lower than expected, prompting market to readjust their expectation on interest rate. MYR IRS rates ended the week circa 3 ~ 10bps lower.

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