Weekly FX Update, 8 June 2015

US dollar hitting fresh multi-week lows as economic data pointing to progress in Europe while U.S. numbers have raised questions about the shape of the world’s biggest economy. The greenback selling was also driven by the IMF’s downgrade of its forecast for US growth this year to 2.5% from 3.1% and its recommendation that the Fed should not raise interest rates until the first half of next year. On the right side of the Atlantic, inflation has returned and unemployment is down with Europe’s economy seemingly headed in the right direction, which drove Euro’s bond yields higher that has improved the currency’s appeal. It also helped that ECB President Draghi didn’t take issue with rising bond yields which can act as headwinds on borrowing and spending and potentially hinder the recovery.  The sell-off in the euro-zone government bond market has continued which is prompting a squeeze of euro short positions and the sell-off got accelerated after ECB President Draghi stated that we should get used to periods of higher volatility. “Keep calm and carry on” was the main message from the ECB at its June meeting. In line with the April rhetoric, the ECB stressed that “full implementation” of its monetary policy measures will “provide the necessary support” to the Eurozone economy, underpin the “firm anchoring” of longer-term inflation expectations, and lead to a “sustained return” of inflation towards the “below but close to, 2%” policy objective. And in the case of Japanese Yen, the depreciation pressure starting to ease but that’s not altogether surprising given the rapid nature of the move up from 120 since mid-May. What really interesting was that cross EUR/JPY pushing above 140 for the first time since late January 2015, benefiting from Draghi’s hawkish press conference. Asian currencies with an exception of Hong Kong dollar fell against US dollar on the back of an increased volatility and overheating in stock markets and concerns over the spreading Middle East Respiratory Syndrome (MERS) contagion. Philippine Peso fell 0.72% fast approaching the 45-figure – second top losers after Ringgit Malaysia due renewed expectations that the central bank could cut policy rates given that inflation slowed in May and continued selling by foreign funds. Indonesian Rupiah eased 0.55% - a high not seen since the Asian financial crisis on a combination of selling in equities and an even larger sell down in government debts. Ringgit Malaysia down 0.88% against US dollar –top losers among Asian currencies, towards 3.712 as SGD/MYR maintained its upward push into uncharted territories largely on a resilient Singapore dollar, wild swing in oil prices and rising cross-default swap (CDS) rate. The 5-year CDS rate rose 3.6% week-on-week to trade above 118 in response to rising political noises over the sensational 1MDB and risk of Fitch rating downgrade. Treasury Secretary-General Tan Sri Mohd Irwan Serigar Abdullah opined that Fitch Ratings, which had warned of a more than 50% chance of a downgrade in Malaysia's rating in the future, could have changed their perceptions of the country following a meeting with Finance Ministry officials early this week. Irwan said Fitch Ratings would return within one month with Malaysia's economy ratings. On the macro front, the approved manufacturing investment rebounded sharply by 152.6% to RM33.7 billion in 1Q 2015 after falling by 50.9% to RM8.4billion in 4Q 2014 and compared to +27.5% or RM16.1 billion in 3Q2014 respectively. Meanwhile, Malaysia’s exports and imports in April fell 8.8% and 7.0% annually. Decreased in exports was mainly due to the slump in petroleum exports.