Snapshot Summary…

Global Rates: Major global bond curves were bearish as investors reassess their rate outlook

MYR Bonds: Ringgit government bonds weakened to follow global market weakness

Global FX: The demand for the USD up ticked during the first week of 2024, pressuring other currencies

USD/MYR: The ringgit weakened due to lack of support against the stronger USD
 

Fixed Income

Global bonds: Following the recent rally in UST market with 10Y yield dropping to below 4.00% during end 2023 (it hovered near 5.00% in October) due to the pricing in of aggressive rate cut by the US Fed, market participants last week reassessed their rate outlook and toned down their expectations. The curve bear steepened as 2Y UST yield rose 13 bps while 10Y yield climbed 17 bps w/w from 3.88%. According to the Fed Fund futures, as of writing, the probabilities for a 25 bps rate cut to happen in March 2024 meeting is already down to 60%, from 73.4% in the last week of 2023. Explaining this sentiment was the stronger than expected labour market data released throughout last week Including the higher ADP employment numbers, lower initial jobless claims, increased non-farm payrolls and faster wage growth. Also, pressuring the UST curve was the cautiously dovish tone in the latest December’s meeting minutes. The minutes suggested that policymakers were concerned with ‘overly restrictive’ policy, hopeful that they can bring inflation down without causing deep recession without hinting clearly when the rate cut will commence. But they also warned that the latest economic projections are associated with “an unusually elevated degree of certainty” and further rate increase is still possible. The higher yields movement in UST were also mirrored in the Gilt and Bund market with the former saw much higher quantum.
MYR Government Bonds: In tandem, Malaysia’s sovereign bonds traced the weakness in global bonds. The 10Y MGS yield surged 14 bps hitting 3.87%, its highest level since mid-November 2023. During the week, the first govvies paper auction of 2024 was executed; the reopening of MGII 08/33 with MYR5 billion issue size, saw a good demand with bid-to-cover ratio of 2.44x to start the year vs. 2023 average of 2.16x. The next tender will be the reopening of MGS 03/53 and the issue amount is expected to be around MYR4.5 billion – MYR5.0 billion.
MYR Corporate Bonds: Despite the weaker tone seen in the MGS/GII space, we saw bullish trades continue to overwhelm the PDS market. Volume traded was recorded at MYR2.83 billion during the first week of 2024 with quasi-government papers such as Cagamas, Danainfra, LPPSA, and etc. continued to garner interests in the market
 

Forex

DXY Index: Amidst the retreat in Fed’s aggressive rate cut expectations, the DXY surged 1.1% w/w, starting the new year on robust note. The dollar index also found support from the safe haven bid following the escalation in Middle Eastern conflict recently. But on Friday, the DXY gains were capped by the weaker readings on Services PMI by ISM as it may signal an apparent initial sign of weaknesses in the economy and put more pressure for the US Fed to cut its rate quickly.
Europe: Against the stronger USD, the EUR fell 0.9% to close the week at 1.094. The falling EUR could also be attributed to the preliminary Germany’s and France’s inflation rate, which generally in line with what was market expecting and may suggest that the tight monetary policy is successful in bringing the inflation down. Also, the Eurozone’s inflation for December was at 2.9% y/y, slightly faster than November’s figure of 2.4% y/y but below market forecast of 3.0%. Meanwhile, the GBP fell 0.1% against the USD. The expectations that the BoE continue to be hawkish due to stubbornly high inflation and unexpectedly faster expansion in UK’s services sector managed to provide some tractions for the currency.
Asia Pacific: Recent natural disasters in Japan casts some doubts over BoJ’s plan in reversing its negative interest rate policy. Coupled with the repricing in US rates by the market, the JPY declined sharply by 2.5% during the week to settle at 144.63. In China, the yuan also was on the downside as market participants expect further easing monetary policy in China to accommodate the fragile economic recovery. However, some dollar selling by state-owned banks towards the end of the week according to news flow, helped support the currency from falling further against the USD. In the meantime, commodity linked currencies such as the AUD and NZD could not find tractions against higher USD as sentiment in the market was tilted towards risk-off mode. On the data front, Australia’s manufacturing PMI remained in the contractionary region for the tenth consecutive months amidst unprecedently tight monetary policy and slump in global trade. The USD/SGD pair chalked up 0.7% w/w higher. This is despite data showed Singapore’s 4Q2023 GDP grew faster at 2.8% y/y (or 1.7% q/q), the fastest pace since 3Q2022, from previous quarter figure of 1.0% y/y. But for the full year 2023, the economy advanced 1.2%, slower than 3.6% growth in 2022.
Malaysia: There was lack of fresh data drive domestically, which could mean what drove the ringgit during the week depends on exogenous factor. In tandem with the bearish trend in emerging market currencies, risk-off mode and investors’ focus on US rate outlook, the ringgit weakened 1.3% to settle the week at 4.655. During the week, the USD/MYR pair touched its weekly high of 4.655 and low of 4.589. Nonetheless, for now, we continue to be optimistic that the ringgit could trade stronger at 4.50 by the end of 2024 as the dollar’s strength will reverse soon when the Fed clearly communicates to cut its interest rate.

Source: AmInvest Research - 8 Jan 2024