Global Forex Market

IN the latest FOMC minutes, the reduction in the Fed’s balance sheet came into light once again with Fed officials having agreed to gradually shrink the US$4.5 trillion this year. Fed officials were also cautious over the apparent transitory nature of the quarter one GDP slowdown which could derail timing of further rate hikes.

This caused the US dollar index to come under pressure this week but it managed to rebound by 0.1% to close at 97.25 on Thursday with favourable jobs and PMI data. Initial jobless claims for the week ended May 20 rose less-than-expected to 234,000 from 233,000 while services PMI rose to 54 from 53.1 in April, its highest reading in four months.

Brent crude oil slumped by 4% to US$51.50/barrel after the Organisation of the Petroleum Exporting Countries’ (Opec) decision to extend production cuts by nine months failed to surprise the market which expected deeper and longer cuts. The drop in oil had offset earlier gains seen in the week after EIA’s weekly report showed inventories fell 4.43 million barrels in the week of May 19.

The euro rose against the softer dollar by 0.04% supported by Chancellor Angela Merkel’s comment that Germany’s large trade surplus was led by the weak euro due to the current expansionary monetary policy.

Further gains in the currency pair was capped after Draghi commented that there is no need to deviate from the current monetary policy stance. On the data front, manufacturing PMI in May expanded to 57 from 56.5 in April, making it its highest reading since April 2011.

The pound was the worst performing G10 currency this week, falling by 0.7% following Theresa May’s statement that the terror threat level in the UK had been raised to “critical” after bomb explosion in Manchester. The pound also came under selling pressure after Q1 GDP was revised downwards to 0.2%m/m from 0.7%m/m due to slower growth of the services sector and household spending.

The yen weakened by 0.5% against the US dollar led by the 2bps rise in US 10-year Treasury yields following the release of White House Budget 2018. During the week, BoJ Governor Kuroda stated that the uncertainty about the natural interest rate is making it difficult for central bankers to steer policy which has led central banks to adopt unconventional economic policies.

All Asia-ex Japan currencies appreciated against the US dollar except the Singapore dollar and Hong Kong dollar. In line with consensus expectations, the Bank of Thailand (BoT) kept its policy rate steady at 1.50% as it continued to support economic recovery amidst global uncertainties. In Singapore, first quarter GDP moderated to 2.7%y/y from 2.9%y/y previously, where the contraction in construction managed to offset the gains in the services and manufacturing sectors.

The ringgit was the best performing Asian currency against the greenback over the week as it advanced by 1.4% due to the weaker dollar and Q1 GDP grew by 5.6% y/y (1.8% q/q) compared to 4.5% in Q4 2016.

The Q1 2017 growth is the highest reported in two years which was largely driven by domestic demand and exports.

Meanwhile, Malaysian Government Securities’ (MGS) 5-year yield was up 1.2bps to 3.566 while 10-year yield dropped by 0.1bps to 3.872 led by profit taking while investors also awaited the announcement of the reopening of the 7-year MGII.