Weekly FX Update, 1 June 2015

The US dollar index, DXY, remained its upward momentum boosted by the better-than-expected core inflation data and the comments on interest rates from Federal Reserve Chair Janet Yellen last Friday which enticed strong buying interests from traders upon returning from the Monday holiday. DXY rebounded from its recent low of 93.1 to the one-month high of 97.7 as a growing set of improving economic data breathes new life into the rally of DXY. The underlying figures in the overall April durable-goods orders show signs of pickup in business spending. The core capex orders, a key measure of business investment, rose for the second consecutive month, suggesting companies are slowly starting to boost investment after the sharp decline in February. Elsewhere, positive consumer confidence data and new home sales data also helped to support the strengthening of DXY. The Euro fall below the 1.10 level and touched its 1-month low of 1.08 against USD on a surging greenback and doubts over Greece’s ability to repay its debts. Concerns over whether Greece would have enough money to make a payment of about EUR1.6 billion to the International Monetary Fund in June resulted in the selling of EUR to buy the safe-haven currency, USD. Meanwhile, the German bonds also benefited from the uncertainty in the Greek debt negotiations, with 10-year yields down 7 basis points at the time of writing. The declining trend in the net long euro positions since May also contributed to the weakening of euro against USD. The Japanese Yen weakened to a 13-year low, fueling the longest rally in Japan’s Nikkei 225 Stock Average since 1988. The yen has borne the effect of a resurgent USD, slipping the most among Asian currencies at the time of writing as monetary policies in Japan and the US diverge. While Yellen indicated borrowing costs will increase this year, Kuroda said it is “too early to discuss when the monetary easing should end”, indicating the widening gap between US and Japanese interest rates. Yet, a weaker yen helps to boost export revenue for Japan’s largest companies, which reported record profits in the last fiscal year.  It was no surprise to note that Asia currencies ended the week with a negative bias against US dollar. Leading the loss were Ringgit Malaysia, followed by Korean Won and Taiwanese Dollar. The weakening of both Korean Won and Taiwanese Dollar mainly due to the weakening of Japanese Yen, where three currencies often move in tandem as the nations’ exports compete in international markets. Meanwhile, comments from Bank of Korea’s chief that the country’s growth is facing increasing uncertainties pressured the Korean Won. As mentioned, Ringgit Malaysia leads the loss among Asian ex-Japan against the greenback following the sharp declined in local equity markets and also the weaker crude oil prices. As a result of the regional plunge in equity markets, KLCI touched the 4-month low at the 1,749.78 level before rebounded back above 1,750 level. Meanwhile, crude oil prices declined throughout the week due to the strong USD and the news that Iraq plans to raise exports by 26% in June. On the macro front, unemployment rate in Malaysia dropped 0.2% to 3.0% in March, with the labour force participation rate increased 0.3% to 67.7%. Meanwhile, Moody's Investors Service said that Moody's-rated issuers – including corporates and financial institutions – in Malaysia are showing that they can withstand external and domestic challenges, while the economy continues to grow, although at a moderating pace. Moody’s also cited that in the event of depressed oil prices over the course of 2015 and 2016, the rating agency will reconsider its core views of relative stability for the sovereign and rate entities in Malaysia over the coming quarters.