• Fed meeting minutes points to another 50bps or 75bps rate hike in July

• Economic Update: BNM pushes OPR to 2.25%

Global Highlights

Dollar Index – The greenback soared 0.53% to 107.10, touching a new 20-year high. The minutes from June’s meeting indicated that the Fed’s officials are now seeing that a “more restrictive policy” is proper if inflation is seen to not be cooling down and backed either a 50bps or 75bps rate hike during July’s meeting. We maintain our view that the Fed is prioritizing the inflation target of 2.00% over the US economy’s stable outlook growth.

On the data front, the US JOLT’s job openings fell to 11.3 million in May, down from 11.7 million in the previous month (cons.: 11 million), while the ISM nonmanufacturing PMI edged lower to 55.3 in June from 55.9 in May, marking the third consecutive months of slowing growth (cons.: 54.3).

US equities & sovereign bonds – Wall Street traded higher with the Dow Jones climbing 0.23% to 31,038, the S&P 500 gaining 0.36% to 3,845 while the Nasdaq rose 0.35% to 11,362. The closely watch recession indicator UST10/2y differentials inverted again at -7.4bps when the UST10Y yield climbed 12.3bps to 2.928% while the UST2Y surged higher by 18.3bps to 3.002%.

Euro – The euro fell 0.82% to 1.018, the weakest level in 20 years and approaching the parity level with the dollar. The Nord Stream 1 pipeline, which tunnels gas from Russia to the EU, will be closed temporarily and worsening fears that the EU will not be able to accumulate energy to prepare for winter.

British pound – The pound depreciated by 0.18% to 1.193. Political turmoil persists with 32 lawmakers resigning, indicating their loss in confidence towards the British PM and will pressure him to resign. The BoE is sticking to its “steady-handed” approach on interest rate hikes while warning the UK economy may not see growth over the next year.

Japanese yen – The yen shed 0.07% to 135.95. A BoJ survey showed the highest ratio of household expectations on higher prices a year from now at 87.1% in June. Also, core CPI excluding fresh food items topped the 2% target.

Chinese yuan – The yuan rose by 0.17% to 6.708 as China issued 5 million tonnes of fuel export quotas to benefit from high fuel prices in Asia and improve its balance sheet while increasing crude oil prices. On the pandemic front, new infections jumped in Shanghai, prompting new fears of another lockdown.

Korean won – The won weakened by 0.53% to 1,307. Recession worries caused South Korean shares to fall as the Korean won touched a 13-year low on Wednesday.

Australian dollar – The Aussie dollar fell by 0.34% to 0.678. House prices are predicted to fall between 15% and 20% with Australia’s “big four” lenders passing on the RBA’s 50 bps cash rate hike onto their customers.

Commodities Highlights

Crude oil – Recession worries that it may hit oil demand caused oil prices to slide on Wednesday. Brent dropped 2.02% to US$100 per barrel while WTI fell 0.97% to US$98 per barrel.

Gold – The gold price tumbled 1.47% to US$1,739/oz as higher interest rate and a solid dollar are preventing investors to opt in for gold.

Malaysia Highlights

Malaysian ringgit – The ringgit worsened by 0.11% to 4.424 and traded within the range of 4.425 and 4.419. BNM raised the OPR by 25bps to 2.25% after the MPC meeting recently.

While we have fully factored in a 25bps hike in July, we were expecting BNM to adopt a more aggressive stance, similar to other central banks, and hike rate by 50bps in a move to cool inflation and help support the weakening ringgit not just against the USD but also on cross rates. However, BNM has decided to increase the OPR by 25bps to 2.25%.

While there were concerns over rising interest rates will increase the borrowing cost for both businesses and households, it is important to weigh the cost and benefits between raising rates and the weakening ringgit.

Under current circumstances, the weakening ringgit is due to the stronger dollar which is benefiting from the aggressive rate hike by the Fed. With BNM only hiking OPR by 25bps, the ringgit weakened to 4.42 against the USD.

KLSE – The FBM KLCI tumbled 1.39% to 1,421, dragged by energy and plantation. Detailed transactions showed that foreign investors were net sellers with RM61.2mil while local institutions and retailers were net buyers with RM5.3mil and RM55.9mil flow, respectively.

Fixed income – Most benchmark yields in the local bond market seen better bids with 3-years -4.0bps to 3.460%, 5-year -9.0bps to 3.810%, 5-years - 13.0bps to 4.030%, and 10-year -11.bps to 4.090%.

Rates – The IRS yield for (3Y) was -15.5bps to 3.475%, (5Y) -15.5bps to 3.650%, (7Y) -14.0bps to 3.750%, and (10Y) -18.0bps to at 3.850%

Against major currencies – The ringgit had the upper hand against EUR, GBP, THB, PHP, and VND but lost against AUD, JPY, CNY, SGD, and IDR.

Ringgit Outlook for the Day

We expect the MYR to trade between our support level of 4.4100 and 4.4150 while our resistance is pinned at 4.4480 and 4.4500.

Source: AmInvest Research - 7 Jul 2022