The Star Online: Treasury Pulse

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Treasury Pulse

Global Forex Market

THE dollar fell 0.54% to 97.117 after the Federal Reserve struck a dovish tone in its June policy statement while keeping its benchmark interest rates unchanged at 2.25%–2.50%. The decision came amid divisions over what is ahead and still leaves open the possibility that policy loosening could happen before the end of the year depending on how conditions unfold.

According to the FOMC statement, the Fed dropped the word “patient” in describing its approach to policy and tweaked its language from May’s statement to indicate that economic activity is “rising at a moderate rate”, a downgrade from “solid”. The economic projection also ticked down as officials slashed core PCE in 2019 and 2020, to 1.8% and 1.9%, respectively from 2.0% for both years. Besides, the dollar was also weighed down by disappointing economic release with June NY Empire State Manufacturing Index falling unexpectedly to 8.6 points from 17.8 points in May (cons: 10), marking the biggest drop in history and the lowest reading since October 2016. However, the downside risk for the dollar was partially cushioned by dovish ECB President Draghi’s comments, added with a slight improvement in the US-China trade sentiment after officials confirmed President Donald Trump and President Xi Jinping will meet at the G20 summit.

In the commodity space, the Brent crude oil surged 5.76% to US$65.5/bbl after Trump blasted Tehran on his social media, fuelling concerns of a conflict between the two countries following Iran’s shooting of a US military drone. Besides, the higher Brent crude oil prices were supported by a drop in supply with the EIA reporting that inventory fell by 3.106 million barrel as of 14 June from a gain of 2.206 million in the week prior.

The euro appreciated by 0.67% largely underpinned by a weaker dollar. However, the euro was seen weaker at the start of the week with Draghi signalling an outright dovish tone, citing “if outlook doesn’t improve, additional stimulus needed”, paving the way for a fresh dose of monetary policy stimulus if the outlook does not improve. Besides, the ECB also published its economic bulletin this week and it continued to highlight a gradual weakening in growth momentum in the bloc; global financial conditions have been volatile in recent months; and global growth is projected to decelerate in 2019 amid rising headwinds.

The pound turned out as the best performer for the week among its G4 peers, strengthening by 1.34% to 1.270 against the weaker dollar as Brexit noises eased towards the end of the week. Nonetheless, the focus of the week was Bank of England monetary policy meeting with policymakers holding interest rates unchanged at 0.75% amid the possibility of a no-deal Brexit still hanging over the UK.

The yen rose 1.14% to 107.3 against the weaker dollar amid Bank of Japan maintaining its monetary policy positions – keeping its key interest rate at -0.1% while the 10-year Japanese Government Bond yield target is still 0.0% and the pledge to increase bond holdings by 80 trillion yen annually. However, economic release for the week remained slightly weak as: (1) May headline inflation eased to 0.7% y-o-y from 0.9% y-o-y in April; (2) core inflation slowed down to 0.8% y-o-y in May from 0.9% y-o-y in April; and (3) June’s Nikkei Manufacturing PMI estimate contracted further to 49.5 compared with 49.8 in May. Asia ex-Japan currencies showed a broad-based strength with the South Korean won in the lead, posting a gain of 2.07% to 1,162.0 amid foreign funds recording an inflow of US$294mil. The Philippine peso rose 1.28% to 51.5 as the Philippine central bank surprisingly kept its benchmark interest unchanged at 4.50% but left the door open to further policy easing to guard against rising economic risks from a heated Sino-US trade war and slowing global growth.

The Malaysian ringgit surged 0.73% to 4.147 as the dollar’s sell-off kicked in. Besides, the FBM KLCI also posted a notable gain this week, up 2.3% to 1,675 although foreigners continued to turn net sellers, recording an outflow of RM26mil.

US Treasuries (UST) Market

The Treasury curve bull steepened as the FOMC meeting ended in line with expectations with the Federal Reserve voting nine-to-one to keep its benchmark interest rates unchanged at 2.25%–2.50% while the interest on excess reserves (IOER) is maintained at 2.35%. At the same time, the Fed indicated a readiness to slash interest rates to sustain the expansion as uncertainties have increased while inflationary pressures stayed muted.

Meanwhile, the much-awaited median dot plot reflected no rate changes through the rest of 2019, but FOMC participants are inclined to cut rates and expect lower rates in the longer run compared with the March projection. The economic projection also ticked down as officials slashed core PCE in 2019 and 2020, to 1.8% and 1.9%, respectively from 2.0% for both years. At the post-statement news conference, Fed chair Powell still kept the “July cut” narrative alive, saying that several important data points will be known by then. As at Friday, the 2-, 5-, 10- and 30-year benchmark UST yields stood at 1.755%, 1.760%, 2.006% and 2.504%, respectively.

Malaysian Bond Market

The buying in the bond market firmed up slightly across the curve owing to the Federal Reserve’s policy rate decision. By the end of the week, we saw the yields adding 1.6bps on the average across the board with the GII 10- and 15-year tenors slipping the most by 8.0bps. As at Friday noon, the 3-, 5-, 7-, 10-, 15-, 20- and 30-year benchmark MGS yields settled at 3.326%, 3.425%, 3.566%, 3.649%, 3.980%, 4.122% and 4.413%, respectively.

Activities in govvies slumped 6.4% to RM21.8bil in the current week compared with last week’s RM23.3bil. The MGS space saw bullish flows, rising to RM14.1bil from RM13.0bil, contributing 65% while the GII was down 25% to RM7.0bil from RM9.3bil in the prior week, occupying 32% of the total volume traded. In tandem with the govvies’ trading flow, activities in PDS shaved off 47% to RM2.6bil from RM4.9bil with the GG/AAA segment contributing 61% of the trading space. The AA segment accounted for about 38% and the remaining 2% were from the A segment.

In the GG/AAA segment, DanaInfra Nasional Bhd IMTN 2024–2049 tranches topped the list with RM405mil traded at 3.559%–4.485%. Next are Projek Lebuhraya Usahama Bhd (PLUS) 2021-2026 papers which gobbled up RM157mil and yields closing between 3.634% and 4.508%. These were followed by ‘02/32 and ‘09/32 GovCo Holdings Bhd papers which changed hands at 4.148% and 4.240%, respectively amounting to RM150mil.

Meanwhile, in the AA segment, Edra Energy Sdn Bhd IMTN 2025–2035 tranches traded between 4.734% and 5.136% on the back of RM261.3mil. Also, Sarawak Energy Bhd 2026–2033 papers settled at 4.068%–4.346% on top of RM183mil. Last but not least are Kuala Lumpur Kepong Bhd the star online 2022 papers which saw RM90bil flowed through at 3.827%–3.925%.

Ringgit Interest Rate Swap (IRS) Market

The IRS curve was seen easing on the back end of the curve, on an average of 4.3bps with the 10-year falling 6.5bps by end of the week. As at Friday’s noon pricing, the 3-month Klibor stood at 3.46%. Elsewhere, the 5-year CDS fell 6.8% to 61.4bps.

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