Weekly FX Update, 21 Mar 2016

Central Bank monetary policy announcements dominated the market this week. We saw the Federal Reserve left the fed funds rate unchanged and struck a more dovish tone anticipated by the market. The ‘dot plot’ of median participant forecasts implied just two hikes in 2016 rather than the four suggested in December, against the three hikes expected by market players. The GDP forecasts for 2016 were also revised lower on global growth risks and tepid business investment. While oil has provided a downward shock to headline inflation, the more-important core inflation forecasts were unchanged for 2016. As a result of more dovish tone from the Fed, US dollar weakened against broad currencies, despite the better-than-expected US data flow. The core inflation rate, which excluded the food and fuel, recorded the highest reading since May 2012. The Philly Fed manufacturing survey which recorded the first positive reading in seven months together with the second consecutive gain in manufacturing activity in February suggest the downturn in manufacturing may be fading. 

The Euro strengthened against the US dollar benefitted from the dovish Fed announcement and the positive data flow. The euro area industrial production in January rebounded at the fastest pace since September 2009, boosted by a sharp rise in capital goods such as equipment and machinery. The strong rebound in January construction output which echoed the strong reading of industrial production was indicating that businesses and households may be more willing to invest after years of caution. The core inflation rate of the euro area, which revised higher to 0.8% also helped the euro to climb against the US dollar.

The Japanese yen soared against the US dollar after the Bank of Japan (BoJ) opted to hold its stimulus at an annualized JPY80 trillion and the deposit rate at -0.1%, as markets took BoJ inaction as a sign of approval for JPY strengthen, despite the emphasize from BoJ that it would take additional easing measures if needed for achieving the price stability target. Stronger-than-expected macro data also helped to support the yen. The core machine orders, which widely regarded as a leading indicator for future capital spending, rose 15% in January on the back of large orders from the steel industry.

Asian currencies were on appreciation bias against the US dollar as markets continued to liquidate USD longs and the flowing back of foreign money into local equities and rates. Leading the gain were Korean Won, Taiwanese dollar and Singapore dollar. The Korean Won broke its 200-day moving average of 1,173.0 and touched the lowest reading of 1,157.4 against the US dollar on the back of capital inflows and the strengthening of Japanese yen. Taiwanese dollar also benefitted from the foreign inflow into local equities. Elsewhere, Singapore dollar strengthened against the greenback on the back of stronger-than-expected retails sales and exports growth.

Ringgit Malaysia extended its gains to close below the 4.06 in response to stronger equity markets, drop in credit risk premium and the rally in crude oil prices. The KLCI soared to close above 1,700 level as foreign investors increased their holding in the local equity. Elsewhere, both 1-month volatility and 5-year credit default swap (CDS) rate which measured credit risk premium continued to plunge. The 5-year CDS rate dropped to settle at 144.0 points, the lowest reading since July 2015. Brent crude oil price closed above the US$40 per barrel level as Qatar energy minister stated that oil producers are expected to meet on 17 April in Doha do discuss capping oil production. Improving fundamentals also helped to support the crude oil prices, as the API stated US oil production stood at 9.11Mb/d in February, down 3.6% y/y, which matched with EIA’s estimate of 9.06Mb/d.