Weekly FX Update, 29 Feb 2016

US dollar rallied against major currencies after a series of better-than-forecast economic reports boosted the outlook of US growth. A revised reading of gross domestic product (GDP) last quarter showed the US economy grew at a 1% annualized rate, compared with an initial estimate of 0.7%. Consumer spending, which accounts for almost 70% of the US economy, climbed in January by the most in eight months on the back of steady hiring, cheap gasoline and rising home values. Elsewhere, the core personal consumption expenditure (PCE) index rose 1.7% over the past 12 months, which has exceeded the 1.6% Fed officials forecast for the fourth quarter of 2016. University of Michigan’s final sentiment index which showed little changed in February as Americans grew more upbeat about their finances also helped to support the US dollar against broad currencies.

Euro depreciated against the US dollar on the back of disappointed data. Markit's Composite Flash Purchasing Managers' Index (PMI) for the euro area slumped to a 13-month low of 52.7 from January's 53.6, after activity slowed in Germany and contracted in France. The weaker-than-expected PMI data just solidified expectations of more monetary policy easing from the European Central Bank (ECB) in March. Euro area inflation rate which was slower than initially estimated in January together with the 5-year, 5-year forward inflation-swap rate touched a 1.34%, the lowest since Bloomberg started tracking the data in 2004, added more pressure to the currency as well. The 5Y5Y forward inflation-swap rate is the gauge inflation expectations in the euro region, which ECB President Draghi has referred to previously.

The British pound headed for its worst week in more than seven years as anxiety the UK will leave the European Union (EU) pushed the currency to its lowest level since 2009. The IMF warning of the possible implications and economic uncertainties the UK economy may face if they leave the EU just created more downward pressure on the Sterling.

Most Asian currencies depreciated against the US dollar due to the plunge in equity markets across Asia. Leading the loss were Singapore dollar, Ringgit Malaysia and Korean won. Growth and inflation are pointing downwards in Singapore, which raise more expectation of further monetary easing by Singapore central bank. Singapore GDP dipped lower in the fourth quarter, with a gain of 1.8%, shy of the estimate of 2.0% and the inflation rate remained at -0.6% in January. Korean Won fell to its lowest since June 2010 after a ‘major upgrade’ in new sanction proposed by UN against North Korea.

Ringgit Malaysia depreciated against the greenback as the USD/MYR 1-month volatility remained above the 11.5% level, the Malaysia 5-year credit default swap (CDS) rate that remained above 180 level, and the surge in cross SGD/MYR to close above 3.00 level. The sell-off in KLCI index also added more pressure on the Ringgit against the US dollar. Rising oil prices after the news that Russia, Saudi Arabia, and Qatar have agreed to meet in March to discuss capping crude oil production at January levels failed to strengthen the Ringgit. The reaffirmation of Malaysia’s long-term foreign-currency issuer default ratings (IDRs) at 'A-' with Stable outlooks didn’t do any favour to Ringgit as well. According to Fitch in a statement, the rating is reflecting key drivers including authorities’ commitment to fiscal consolidation path, stable ringgit, reserves and stronger economic growth.