Saturday July 21, 2012

Treasury Pulse

Global forex market

THE foreign exchange (forex) market was more active this week. Despite a slew of negative data, it was mostly risk-on with the poor economic data making it more likely for further quantitative easing (QE). QE has been successful in the past in boosting asset prices and consequently weakening the US dollar. Hence, the trend repeating itself currently, with the ringgit appreciating 0.66% this week to 3.1550 against the greenback.

Early in the week, following the previous week's news of lower than expected China gross domestic product (GDP) growth and declining US consumer confidence prompted investors to posit further easing by the Federal Reserves and other central banks, causing risk assets to rally. The University of Michigan Consumer Sentiment index dropped to 72 in July, falling below the market consensus of 73.5 and the previous month's 73.2 respectively.

Mid-week, Fed chairman Bernanke kept alive views that the central bank may take further steps to stimulate growth but was evasive on the possible timing of QE3.

Against the trend, the US June industrial production rebounded by 0.4% month-on-month after an upwardly revised 0.2% drop in May, exceeding forecast of a 0.3% growth. Industrial production climbed more than expected in June, led by gains among automobile and machinery makers that signal manufacturing is boosting economic growth.

The Conference Board's leading indicators index fell by 0.3% in June after an upwardly revised 0.4% boost in the previous month and worse than the consensus forecast of a 0.1% decline.

In the UK June, CPI eased to 2.4% year-o-year, following the previous month's gain of 2.8%. Inflation in the United Kingdom unexpectedly fell to the lowest level in 2 years as clothing prices plunged. Similarly, the core CPI moderated to 2.1% year-on-year from 2.2% in May. Unexpectedly, the UK's jobless rate fell marginally to 8.1% in the second quarter from 8.2% in the previous quarter. Besides the United Kingdom, Moody's downgraded Italy's sovereign rating by 2 notches to Baa2 with a negative outlook.

In Asia, China's property price growth in June shows signs of stabilisation despite China's second-quarter GDP growing by only 7.6% year-on-year, moderating from the prior quarter's 8.1%. Separately, Malaysia's CPI inflation dipped to 1.6% year-on-year in June, from 1.7% in May. Food inflation was 2.9% while transportation inflation was 0.2%. Similarly, India's CPI inflation eased to 10.0% year-on-year in June, from 10.4% in May.

Singapore's second-quarter GDP unexpectedly fell an annualised 1.1% from the previous quarter revised 9.4%. In contrast, Singapore's June exports unexpectedly quickened on pharmaceuticals. The June non-oil domestic exports advanced by 6.8% year-on-year, beating the previous months' 2% and 3.2% respectively.

The forex market finally showed some direction this week. We speculate if it's the right decision, but good traders will tell you, the trend is your friend and the market is always right. QE or no QE, the appetite for risk is on.

US Treasuries (UST) market

UST yields generally eased along the shorter-tenured maturities. At time of writing yields on two- and five-year reached 0.21% and 0.6% respectively.

Malaysian bond market

With the local CPI having eased to 1.6% year-on-year in June versus the preceding month's level of 1.7%, this could pave the way for Bank Negara in maintaining pro-growth monetary policies going forward. Expect the local yield curve to mirror a flattening bias in the near term amid a somewhat benign interest rate outlook and inflation prospects. This could serve as catalyst for some players seeking to reap benefits from further curve flattening by extending investments to include longer-dated bonds.

In the Malaysian Government Securities (MGS)/Government Investment Issues market, RM13.2bil worth of trades transacted with a daily average trading volume of RM3.3bil versus last week's average of RM4.5bil. During the week, MGS benchmarks traded generally higher with the three-, 10-, 15- and 20-year yields closing the day at 3.03%, 3.42%, 3.66% and 3.81% respectively. Meanwhile, five- and seven-year benchmark MGS yields traded unchanged at 3.17% and 3.29% respectively.

In the private debt securities market, a total of RM3.2bil worth of trades done with 67% coming from the GG/AAA segment, 29% from the AA segment and remaining balance from the single-A segment. For the week, daily average trade volume was higher at RM812mil, easing from the RM390mil average seen in the previous week.

In the GG/AAA segment, active trading interest was witnessed in Manjung Island bonds maturing 2016-2023 with RM415mil worth of trades done. Significant interests were also seen in GG-tranche of Prasarana bonds maturing 2015-2026 which saw RM332mil worth of trades transacted, and AAA-rated PLUS bonds maturing 2017-2031 which generated a total trading volume of RM275mil.

In the AA-segment, banking sector bonds led the trades, accounting for 47% of the total secondary volume, followed by power bonds at 20%. RHB Bank bonds maturing 2012-2017 generated total trades worth RM130mil with the yields settling at 3.54%-4.24%, while OCBC Bank Malaysia 11/15 was dealt 2 bps lower with RM125mil changing hands. Among the power bonds, Tanjung Bin Energy maturing 2017-2028 garnered RM70mil worth of trades followed by Sarawak Energy bonds maturing 2016-2027 with RM60mil trades transacted.

Ringgit interest rate swap (IRS) market

The ringgit IRS rates traded range bound as selling interests were met by bidders looking to pay dip following the sharp decline in the previous week. Local rate players continue to take lead from regional rates movement as the immediate term outlook on overnight policy rate remains unchanged. The ringgit IRS rates ended the week 1 ~ 3 bps higher.

● For FX enquiries, contact: fx-research@ambankgroup.com or bond-research@ambankgroup.com

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Saturday July 21, 2012

Treasury Pulse