Weekly FX Update, 13 April 2015

Broad US dollar performance was mixed with an upside bias as players returned to full strength following long Easter holidays and in response to the US FOMC minutes showed that policymakers were split over whether they should raise interest rates in June given the energy-price declines and sharper-than-expected US dollar’s appreciation in curbing inflation. The actual language said “several participants judged that the economic data and outlook were likely to warrant beginning normalization at the June meeting,” but details did support the notion that the debate for June is richer than what many likely expected. Euro, which poked above $1.10 in the early part of the week, fell from its double-top formation to test low of 1.077. Euro bears were enticed to sell the currency due weaker macro flows that showing a surprise 0.9% fall in German industrial orders, the second decline in as many months, and a modest 0.2% drop in euro zone retail sales, sell down in equities and headline risk from Greece with the main news being that Greece’s IMF representative has decided to resign ahead of Thursday’s Euro270 billion debt bill for the IMF. Thaanos Catsambas’s resignation is effective this July and he has yet to explain his decision. The Tsipras’ visit to Russia will unfold some headline risk for the currency as well. Japanese Yen was in trading range with strong support around the middle of 118.5 and lack of significant buying from Japanese investors above 120.5 in inactive real demand. However, there are fun and games ahead with options market is currently pricing a 40 pip jump in USD/JPY for the April 30 Bank of Japan’s announcement and the incoming US Treasury Department’s semi-annual FX report in April and October. With Japan struggling to break free of its deflationary rut, it keeps the risk of stronger policy stimulus on the horizon, which stands in contrast to forecasts for the Fed to raise U.S. interest rates this year. The BOJ is leading the charge on reflationary policies of Prime Minister Shinzo Abe, who took power in December 2012 with a pledge to end two decades of economic stagnation. Asian currencies ended on broad weakness against US dollar. Leading the pack were Singapore dollar, which fell 1.22% followed by Taiwanese dollar of 0.99% and Korean won of 0.70% against US dollar in response to US dollar and rising currencies volatility. Sell-down in other Asian currencies like Indian Rupee, Indonesian Rupiah, Philippines Peso showed sign of easing and there has been notable change of sentiment with regard to emerging markets evidently from rising buying interests in local equities by foreign funds and in response to JPY-crosses, which were broadly higher on risk-on sentiment and the appreciation bias of CNY.  Asian equities continued to build on their bullish momentum rising to multi-year highs with Nikkei at 15-year high; Shanghai Composite and HSI were at 7-year highs respectively. Ringgit Malaysia (MYR) fell 0.97% against US dollar on drop in palm oil prices, weaker local equities, surge in 1-month USD/MYR NDF rate and cross SGD/MYR to a high of 2.6757 from 2.6729 on Thursday. The 1-month NDF MYR rose from 3.6490 on Thursday to 3.6843 on Friday, while the palm oil prices fell to RM2121 on Friday, from a high of RM2,235 during the week. The drop of foreign exchange reserve by US$5.4 billion in March to US$105.1bn as at 31 March failed to have any collateral damage for the currency. On the macro front, the Ministry of Finance clarified that its in-house restructuring outfit, Prokhas has not been appointed to assist 1MDB, which was reported that it needs RM5 billion this year to meet its debt obligations. Meanwhile, Minister in the Prime Minister's Department Datuk Seri Abdul Wahid Omar said the retail and wholesale sector will continue to grow this year partly supported by increase in tourist arrivals despite the Goods and Services Tax (GST) implementation earlier this month. Elsewhere, the industrial production in February slowed to 5.2% y/y following the 7.0% growth in January.