Snapshot Summary…

Global Rates: DM bonds rallied as players reacted to chair Powell signalling the Fed is not far from gaining confidence to cut interest rates this year

MYR Bonds: There was muted reaction to BNM holding the OPR at 3.00%, but trading was aided by the rally in global bond markets

Global FX: Outlook for rate cut(s) this year dampened the dollar

USD/MYR: MYR appreciated further aided by notion that MYR is undervalued

Fixed Income

Global Bonds: Government bonds in the DM space rallied except for in Japan. Players reacted to comments from Fed chair Jerome Powell who signalled not far from gaining confidence to cut interest rate this year. Recent release of weak economic numbers provided support to Powell’s signalling and was picked up by bond traders. These include last week’s lower-than-expected ISM Services PMI for February (declined to 52.6 from a four-month peak of 53.4 in January, falling short of the market’s anticipated 53.0). Aside, there were some support for safe haven UST, triggered by the substantial drop in New York Community Bancorp's share prices which raised questions about the stability of regional banks.

Malaysian Government Bonds: Government bonds strengthened with benchmark papers down 2-4 bps w/w. There was muted reaction to BNM holding the OPR at 3.00%, which met expectations, but trading was aided by the rally in global bond markets and the comments from Fed Chair Jerome Powell who signalled that the Fed is not far from gaining confidence to cut interest rate this year. Malaysian Government Bonds View: Firmer MYR versus USD last week and the decline in MGS yields suggests markets are starting to price in potential narrowing of the USD over MYR interest rate differentials. Our technical analysis suggests there is short term support for USD/MYR below 4.650 and moves towards this level should see the 3Y MGS test below 3.40%.

Malaysian Corporate Bonds: The MYR corporate bond segment was supported alongside the gains in the MGS market. We also note increased net buying flows on lower rated AA and A segments; reflects the better overall sentiment in the ringgit bond pace alongside the outlook for global rate cuts.

Malaysian Corporate Bonds View: Despite the hunt for lower rated papers, we think high grade GGs also offer value; such as on select longer tenor GG Danainfra (Exhibit 2).

Forex

DXY Index: The US dollar experienced a gradual decline, starting off sluggish on last Monday and ending down w/w. The currency's movement was influenced by the anticipation of Federal Reserve actions, with mixed signals from Fed officials about interest rate cuts later in the year. Despite some support from Fed President Bostic's comments and dollar liquidity demand, weaker-than-expected economic data and Federal Reserve Chair Powell's testimony suggesting a forthcoming rate cut contributed to the dollar's decline to a 1-month low by Thursday. And by the end of the week, the mixed to negative labour market data further pushed the dollar demand lower to sub-102.9 level.

Europe: Throughout last week, the EUR appreciated against a weakening USD, supported by slightly positive economic indicators and central bank communications. The improvement in Eurozone Sentix Investor Confidence index, upward revisions in the Eurozone's PMI, and better-than-expected German trade data, contributed to the euro's strength ahead of the ECB policy rate meeting. Post-meeting, the ECB's decision to maintain its deposit facility rate on Thursday, coupled with President Lagarde's cautious stance on monetary easing, helped support the EUR. However, its gains were capped towards the end of the week as Bank of France Governor Francois Villeroy de Galhau opened the door for ECB April rate cut. In the UK, the British pound surged as the dollar was subdued and the UK economy seemed to be on stronger standing than expected, keeping the interest rate to be longer and higher.

Asia: The yuan completed a winning week though it was gains were relatively small compared to most of other Asian currencies. Investors weighed the expectations of US Fed to loosen its monetary policy soon against the still struggling Chinese economy amidst the property slump, thus explaining the movements. Aside, during his address to the annual National People’s Congress, China’s Premier Li Qiang said the growth target for 2024 is set at a modest 5.0% amidst a challenging environment. In Japan, the yen firmed significantly by 2.0% w/w. This was after data showed wage growth in Japan grew 2.0% y/y in January, faster than 1.0% y/y in the prior month. This bolstered the case for the BoJ to exit its ultra-accommodative policy soon as the sustainably higher wage growth could kickstart the wage-price spiral and bring the country out of deflation. The commodity-linked currencies AUD and NZD both rose 1.5% and 1.1%, respectively, benefitting from the risk-on mode. The SGD was also on the upside, rising 1.0% against the weaker dollar.

Malaysia: Ringgit managed to hold its ground and firmed 1.3% to below the 4.70-level. The increased anticipation of a Fed rate cut later this year continued to buoy Asian currencies including the MYR, but the Malaysian currency was aided further post MPC meeting where there's no signal that BNM will cut rates in the foreseeable future. Sentiment was also likely supported by the MPC statement that authorities are in coordinated effort to encourage the repatriation and conversion of foreign investment income by Government-Linked Companies (GLCs) and Government-Linked Investment Companies (GLICs). Our view remains for the ringgit to continue to strengthen and to reach around 4.50 - 4.60 per dollar by the end of 2024, and current strengthening trend bodes well for the currency.

Source: AmInvest Research - 12 Mar 2024