Weekly FX Update, 15 June 2015

The data-deprived US dollar has largely looked abroad for its cues and kept to an unpredictable pattern as markets continue to speculate on first US rate hikes though starting to lose some confidence in the Fed’s stance in recent sessions as well. The currency’s generally overbought status left it prey to profit taking following big bursts of strength. The move to cash in on the dollar’s rise in the early part of the week was compounded by a report – later refuted – that the U.S. administration views a strong dollar as problematic - a sense that U.S. officials might not be as amenable to a strong currency. Greenback sank 1% against Japanese yen to two-week lows and slipped to three-week lows against Euro. Japan has talked up its currency from 13-year lows and bonds in Europe continued to offer juicier yields. Bank of Japan Governor Kuroda downplayed further Japanese yen weakness and have seen shorts reversed their positions. The Swiss 10-year is up 1% since January and out of negative territory at 0.26% and the German Bunds is up 1% since September 2014, in turn has narrowed the advantage comparable U.S. assets offer. Japanese yen once again, fresh bouts of weakness for the currency have proven short-lived, repeating a pattern that has been in place for several months. Kuroda told Japanese lawmakers that the yen’s “very weak” state suggests weakness for now has run its course and a better week for the Japanese economy have also added to the currency’s renewed buoyancy. His comments are broadly in line with recent comments made by high profile economists like Takatoshi Ito, the architect of the pension reform and ex-Ministry of Finance (MoF) officials. Euro in midst of a messy Greek debt negotiation rallied into the upper part of the 1.125 handle as steady ascension in European bond yields to new multi-month highs. Rise in yields has come from signs the bloc’s recovery continues to gain traction. In a good sign for second quarter growth, German industrial production, trade balance and exports all beat out expectations by significant margin. This gave market confidence to buy EUR with the leading economy performing well as a result of stimulus measures. Under such circumstances, Asian currencies ended the week on bullish note. Leading the gains were Japanese yen, Singapore dollar followed by Korean won and Thai baht. Korean won gained 0.78% against the US dollar given its tight correlation with strengthening Japanese Yen despite rising concerns over MERS weigh on growth/ domestic consumption/ tourism/ foreign investment and Bank of Korea (BoK) cutting policy rate by 25 basis points to 1.5% while Singapore dollar gained 0.67% as local equity rebounded towards the later part of the week. Last week, Ringgit Malaysia gained 0.29% against US dollar from a high of 3.7720 on Monday, helped by gained in oil prices, drop in 1-month USD/MYR volatility and relatively stable of local equity despite cross SGD/MYR remained at elevated levels, above 2.775 handle. On the macro front, Bank Negara Governor Zeti, one of the region’s longest-serving governors said that the current depreciation of Ringgit Malaysia is expected to be temporary and the central bank however stands ready to maintain orderly conditions in the foreign exchange market. On the other hand, both Fitch Ratings and Moody’s Investor Service said in an e-mailed reply in response to a spurious text message that they had not downgraded Malaysia’s sovereign to BBB. Fitch has an A- rating with negative outlook while Moody’s has recently affirmed Malaysia’s A3 rating with a positive outlook. Elsewhere, Malaysia’s industrial production increased at a slower pace in April due to weak performances by all the three sectors (manufacturing output, mining output and electricity output).