The committee revamped its forward guidance on interest rates, moving towards more qualitative than quantitative language with the new guidance paragraph dropping the 6.5% unemployment rate threshold. But the FOMC made it clear that the policy itself has not changed. Most on the committee do not expect to begin hiking rates from the current 0% to 0.25% target range until 2015 or even 2016.
News of the third tapering and traders’ interpretation of a more timely return to a rate hike regime for the Fed translated into the US dollar index’s biggest single-day rally in six months and the technical moves were more significant where the monetary policy differences were starkest among the majors.
The Euro levitated by the European Central Bank’s balance sheet reduction and widening interest rates differential – reversed from a multi-year high that was locked at a high of 1.3967 at the early part of the month to a low of 1.3818 at time of writing as market participants turned cautious entering into any strong positions in response to Janet Yellen’s statements.
The Japanese Yen also ended the week on the depreciation bias from 101.63 on Monday to latest 102.30 in response to drop in Nikkei 225 and to Kuroda’s commentary whereby he said much of the yen’s excesses were reduced last year and that gave rise to the growing reticent to boost qualitative easing in Japan sooner than expected.
With the third tapering in place, we saw some loudest protest coming out again from emerging market currencies. In response, the MSCI Emerging Market ETF dropped 2% on heavy volume with Indonesian rupiah falling most, 1.16% against the US dollar, followed by Philippines Peso 0.89% and South Korean won 0.82%.
The feel-good of Jokowi effect on Indonesian markets turned out to be short-lived event and the equity markets fell 3.1%. Meanwhile, Philippines peso fell as the overseas remittances grew 5.9% in January – slowest gains since September and rising inflationary pressures. South Korean won eased as rise in South Korean bond yields was limited compared to US rates and as foreigners sold on KOSPI amid weak housing markets and subdued wage growth.
Malaysian Ringgit down 0.56% against the US dollar for the review period from a low of 3.2783 on Monday to latest 3.2969, attempting to test resistance of 3.3012 of the 50-day moving average. The 1-month non-deliverable forward rallied past 3.3000 along with higher Chinese yuan fixing that rose from 6.1321 to latest 6.1460, which was a relatively sharp increase in the aftermath of widening trading band of Chinese currency last week.
UST market
US Treasuries sold off across the curve after Crimea’s vote to join Russia passed without major incident. Following the outcome of the FOMC meeting, the curve became steep in the belly and long end of the curve. At the time of writing, the 2, 5 and 10-year yields were 8-17 basis points (bps) higher to settle at 0.42%, 1.70% and 2.77%, respectively.
Malaysia bond market
Local govvies saw heavy trading after the announcement of the reopening 10-year Government Investment Issues. The amount of RM2.5bil was smaller than market expectation and this sparked strong buying momentum especially on the 10-year Malaysian Government Securities (MGS) which garnered RM1.9bil worth of trades during the week. However, the buying momentum was short-lived following the FOMC’s more hawkish outlook leading to the strengthening of the US dollar.
As of Thursday’s close, MGS yields on 3, 5, 7, 10, 15, 20 and 30-year MGS stood at a respective 3.38%, 3.56%, 3.91%, 4.08%, 4.47%, 4.59% and 4.87%. The week saw RM12.1bil worth of trades with a daily average trading volume of RM3bil compared to last week’s daily average volume of RM1.7bil.
Moving to the local private debt securities market, buying interest was seen in the belly to long-end of GG bonds. Total trading volume was at RM1.8bil for the week, averaging at RM519mil daily as compared to last week’s average of RM458mil. Approximately 67% of the trading volume was contributed by the GG/AAA segment and 33% by the AA segment.
In the GG/AAA segment, demand was seen for Khazanah bonds maturing 2018-2024 which saw yields eased 3-8 bps with a collective trading volume of RM105mil. Long-end DanaInfra bonds maturing 2028-2033 also saw some buying interest with RM160mil worth of trades reported done, yields came down 3 bps. Other notable trade includes GovCo ‘02/18 garnered RM360mil worth of trades to close at 3.94%.
Ringgit IRS market
Ringgit interest rate swap (IRS) rates ended the week 1-3 bps higher following higher inflation expectation by the local central bank and the more hawkish FOMC statement. KLIBOR is also expected to be fixed higher over time. In the AA-segment, secondary trades were spread out across industries in small volume. BGSM bonds maturing 2017-2023 traded within previous range with collective trading volume of RM95mil.
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