Weekly FX Update, 25 May 2015

Driven by the strong housing data and the European Central Bank’s (ECB) decision to bring forward some asset purchases, the US dollar index, DXY, appreciated and broke above the level of 95.0. Housing starts in US jumped 20.2% on month to 1.14 million, the most since November 2007. Meanwhile, more building permits, a proxy for future construction, were issued than at any time since July 2008. On the other side of the story, the April FOMC minutes suggested that only a few Fed officials would have enough confidence to begin raising interest rates at the June 16-17 meeting. Markets reactions post release of the minutes were relatively quite as markets have priced in the expectation for a delayed in the hiking of interest rates by Fed. Due to the strong US dollar, euro deteriorated from the recent strength and fell below the 1.12 level against USD following the ECB’s decision to frontload the QE purchases and the widening spread between US and Germany bonds. During the week, ECB official, Benoit Coeure, stated that the bank will move forward some buying under the EUR1.1 trillion stimulus program as markets are less active from mid-July through August. The comments sent the euro sharply lower against USD, while the European stock and bond markets rallied. Declined in European bonds’ yields also sparked the euro selling and dollar buying, where market players chased for a higher yield bonds in US. On macro front, both the current situation component and the expectations component of German ZEW Survey declined to 65.9 and 41.9 respectively, suggesting a lower recovery momentum in the second quarter compared with the first. Along with the strengthening of the greenback, Japanese Yen climbed above 120 and touched its two months high of 121.57. The likelihood that the Bank of Japan (BoJ) will undertake another round of monetary easing at this week’s monetary policy meeting increased the pressure on the yen. Asian currencies ended the week with a negative bias against US dollar, except Taiwanese Dollar and China Yuan. China Yuan rose the most this month as a private manufacturing gauge recovered from a one-year low. The preliminary reading of HSBC China Manufacturing PMI indicated the contraction in manufacturing sector slowed for the first time in three months. On macro front, Indonesia’s BB+ outlook changed to positive from stable by Standard & Poor’s, with the possibility that the country may be raised to investment graded within 12 months.

Last week, Ringgit Malaysia weakened 0.44% against the USD with the plunge in local bourse and also declining 3-month crude palm oils future prices. As of Thursday, the FBM KLCI closed below the critical 1,800-point level to 1,795.04 due to foreign selling of key index stocks. On macro front, Malaysian consumer confidence index for the first quarter of 2015 improved to 94%, which was up 5% from the preceding quarter due to falling petrol prices. Meanwhile, Malaysia Prime Minister Najib has tabled the 11th Malaysia Plan 2016-2020 at the Parliament on Thursday. Inside the 11th Malaysia Plan, the government will focus on creating a larger pool of high-skilled workers and improve productivity to increase investment. The plan also stated that RM260 billion will be allocated for development expenditure from 2016 to 2020, which included funds to increase power capacity. Inside the plan as well, the country’s economy is expected to expand 5%-6% a year. In April, Malaysia’s inflation rate expanded at a slower-than-expected pace of 1.8% y/y, following the 0.9% increase in March.