US dollar maintains strength

THE US dollar continues its strong performance while global government as well as corporate bonds remain resilient.

Market sentiment continues to be driven by anticipation that global central banks will ease interest rates this year amid moderating and nearing the inflation targets of respective central banks.

The expectation is that the US Federal Reserve (Fed) and the European Central Bank may start to cut interest rates and funding costs by June this year.

At its latest policy meeting earlier this month, the Fed left its Federal Funds Rate (FFR) steady at the 5.25% to 5.50% range, a 23-year high.

The decision not to shift the FFR was widely expected, but markets focused more on the Fed reiterating its aim to cut interest rates.

After its recent meeting, the Fed’s policymakers released their latest economic projection figures, including expected interest rate levels, for 2024, 2025, 2026, and beyond.

The projections had the FFR dropping to a median level of 4.6% by the end of this year, with about three cuts in the FFR of 25 basis points (bps) each.

Nevertheless, the week’s economic data releases for the United States were mostly stronger than expected, thus raising doubt about how many rate cuts the Fed will conduct this year.

US GDP

The data includes US gross domestic product (GDP) at 3.4% annualised growth in the fourth quarter of 2023 (4Q23), surpassing earlier estimates of 3.2%. Increased consumer spending, exports, and business investment propelled by the growth.

For 2023, the US economy expanded by 2.5%, an improvement from the 1.9% growth in 2022.

US personal consumption increased at a rate of 3.3% in 4Q23, against the expectation of 3% and against the previous quarter’s growth of 3%.

Meanwhile, there were also some better figures for US employment.

The US Labour Department reported that initial claims for state unemployment benefits fell by 2,000 to a seasonally adjusted 210,000 for the week ended March 23, 2024.

Earlier, economists had forecast claims totalling 212,000 in the latest week. For February 2024, durable US manufactured goods orders saw a more-than-expected increase, indicating a potential recovery in business spending on equipment.

The headline reading grew 1.4% month-on-month (m-o-m) after a sharp 6.9% m-o-m drop in the prior month, with notable increases in transportation orders.

Bloomberg reported that as of March 29, trading in the Fed funds futures market is pricing an implied FFR rate of 4.66% by the end of 2024. This is higher than the implied FFR rate of 4.48% per the FFR futures trading a week prior.

Less confident

The higher implied FFR means the market is less confident that the Fed may cut rates by three times this year.

Consequently, the US dollar was broadly supported as it continued to close every session in the past week above the 104 level.

During the Asia session yesterday morning, the dollar index (DXY) briefly touched 104.7, its highest since February.

This is in tandem with the elevated three-month DXY risk reversals (a barometer of market positioning that compares the appetite to buy a currency versus to sell) at around 24.4 bps in favour of calls over puts options compared with 0.05 basis points (bps) early this month.

As for US bonds, we noted that the market remained supported by expectations that the Fed will reduce rates.

However, with US data seen on the upside, there were late losses seen on shorter-dated bonds, which pared their weekly gains.

UST

The two-year US Treasuries (UST) is down two bps week-on-week, but this occurred after the tenure saw yields surging by five bps post-release of the 4Q gross domestic product data.

With the strength seen in the DXY last week, the ringgit remained pressured.

The US dollar/ringgit pair was seen near 4.728 yesterday, up from lows for the week around 4.716. Asian currencies slid, with the yuan being above the 7.20 level despite continuous People’s Bank of China efforts to keep the yuan fixing above market expectations.

Malaysia government bonds

As for Malaysia’s government bonds, we noted some late profit-taking activity. The losses were slanted on the front of the curve, which we note to have mirrored the performance in the UST market.

However, for longer tenures, bonds remained supported. This was despite the strong Malaysian inflation numbers released last week. Inflation registered 1.8% year-on-year (y-o-y) in February 2024, following three months of rising at a rate of 1.5%.

Notable increases in the key categories of housing, water, electricity, gas and other fuels primarily drove the rise.

However, core inflation, which excludes the volatile prices of fresh food and government-administered prices, was also at 1.8% y-o-y, and this was similar to the pace of 1.8% y-o-y in January.