- Qualms of currency movements persisted in the recent weeks due to the devaluation of CNY. Since 10 August, CNY has depreciated 3.1% vs. the USD to close at CNY6.40 per USD on 19 August 2015. The shift in forex regime by China could trigger further easing for Europe and Japan as global economies begin to streamline economic policies ahead of the potential rate increase in the US during 2H15.

- Empirical analysis suggests that regional currencies are positively correlated with CNY, except for GBP and EUR. Within the ASEAN basin, the correlation coefficients for CNY vs. MYR and SGD are relatively higher compared to THB, IDR and PHP. The coefficients correlation for MYR-CNY and SGD-CNY are 0.40 and 0.58, respectively. Meanwhile, THB/ IDR/ PHP are positively correlated with the CNY currency, with coefficients of 0.17/ 0.18/ 0.18, respectively. Based on the recent currency trend for data series since January 2015, GBP is inversely correlated with most regional currencies except HKD and SGD, respectively.

- Ringgit is relatively weaker compared to regional counterparts. As seen in the correlation matrix, Ringgit is positively correlated with regional currencies, except GBP. The coefficient correlation of MYR-GBP is -0.39. As such, weak Ringgit tends to coincide with weak regional currencies. That said, Ringgit had deteriorated sharply against its regional counterparts in recent months (see Chart 4). Also, compared to regional currencies, Ringgit led the pact as the steepest deterioration against the USD as at YTD (see Chart 5).

- Foreign holdings of MGS fell by 0.8% MoM in July. Global holdings of Malaysia’s government bonds remain above 30% for the fifth consecutive month in July. When included both conventional and Islamic sovereign bonds, global holdings stood at 31.5% of total outstanding government bonds (vs. 32.1% in June). In terms of segment, foreign holdings of MGS stood at RM165.4bil (or -0.8% MoM). That accounted for 47.8% of total outstanding MGS in July vs. 48.5% in June. Meanwhile, Government Investment Issues (GII) slipped by 16% MoM to RM8.2bil in June. It rose to an all-time high of RM10.9bil in May.

- Prior to the forex devaluation by China, investors were convinced of a September rate hike. Key indicators showed that the economy has gathered traction. According to the FOMC’s quarterly Summary of Economic Projections in June 2015, the Fed’s median estimates for interest rate at the end of 2015 and 2016 are 0.625% and 1.625%, respectively. The remaining FOMC meetings for the year are scheduled for 16-17 September, 27-28 October and 15-16 December 2015. The question remains as to whether the Fed could persist with policy tightening in September.

- Cliffhanger for the Fed with global developments since July. Since the July meeting, conflicting signals of a rate hike in September have emerged. A report on US employment in July showed job gains, bringing the economy closer to the point of recovery. However, other global developments are likely new reason for caution of an initial rate hike for the US in September. At the FOMC meeting in July, the committee noted the decline in China’s stock market. Since then, Chinese officials devalued the CNY to spur exports growth.

- Crude oil prices hit a six-year low this week. The low global crude oil prices have triggered further uncertainties for sustainable inflation in the US and price increases towards the Fed’s long-term inflation target of 2.0%. Based on Wednesday’s close of USD47.16 per barrel, the Brent crude oil has fallen by 18% YTD. Meanwhile, WTI fell by 23.4% YTD to close at USD40.80 per barrel. As at year-end 2014, the Brent crude oil closed at USD57.33 per barrel and WTI stood at USD53.27 per barrel. YTD averages as at 19 August 2015 for Brent and WTI are USD58.18 and USD52.13 per barrel, respectively.

Source: AmeSecurities Research - 21 Aug 2015