Global Forex Market

VOLATILITY in the global markets was sucked out, leaving major currencies mostly range-bound as investors took the sidelines ahead of Thursday’s development – US May CPI print and European Central Bank (ECB) monetary meeting. Post-event risk, it appeared to add a little new direction to the currency market.

Investors saw the US headline inflation rate soared to a 13 year high of 5% year-on-year (y-o-y) compared with 4.2% y-o-y in April and beating the consensus of 4.7% in the dollar market. Meanwhile, the US core inflation also jumped up 3.8% y-o-y from 3.0% y-o-y in April (consensus 3.4%), marking the faster reading since 1992.

While inflation hits a multi-year high, investors quickly realised that the bulk of the increase was driven by base effects. Besides, the breakdown showed the surge in used car prices skewed the inflation reading. With the overall inflation number is lopsided, investors pared back expectations of earlier-than-anticipated Fed taper plans – leaving the dollar weaker by end of the week, down 0.07% to 90.08. During the week, the dollar traded between 89.95 and 90.12.

Separately, Democrats on Wednesday began preparing an infrastructure bill for a vote in the House, with or without Republican backing.

President Biden will once again discuss the possibilities for a deal with Republican leaders this week after rejecting the GOP’S latest bill offer for a Us$928bil (RM3.8 trillion) spending package on Friday.

The euro was flat, up 0.02% to 1.22 as ECB pushed back expectations to slow down the pace of the emergency bond-buying programme. Nonetheless, as widely expected, ECB kept its interest rates unchanged at -0.50%, and reaffirmed that it will continue to conduct net asset purchases under Pandemic Emergency Purchase Programme (PEPP) with a total envelope of E1.85 trillion (RM9.2 trillion) until at least the end of March 2022.

Meanwhile, the ECB had also become somewhat more optimistic on the outlook, which was illustrated in higher growth and inflation forecasts for this year and next as well as saying risks to the growth outlook were now roughly balanced. However, inflation forecasts for 2023 remain low and the ECB retains the view that higher inflation numbers remain transitory.

The pound strengthened by 0.14% to 1.42, taking cues from the weaker dollar. Still investors grew slightly cautious over the cable’s trade during the week due to the ongoing concerns over a potential delay on UK reopening plans as well as rising uncertainties over Brexit developments.

The yen appreciated by 0.17% to 109.3 benefiting from the falling US Treasury yields. Although Japanese PPI y-o-y recorded highest since September 2008 at 4.9% in May compared to revised 3.8% in April, it’s both Leading and Coincident Economic Index jumped higher at 103.0 and 95.5, respectively than the month before at 102.4 and 95.5 suggesting the recovery in the economy as the number of daily new covid-19 cases has dwindled significantly during the middle of May.

The majority of the Asia ex-japan currencies strengthened against the dollar albeit only posting modest gains. The rupiah came in as the outperformer, up 0.33% to 14,248, followed by South Korean won, up 0.09% to 1,115, and Taiwanese dollar, up 0.08% to 27.69. Meanwhile, the rupee came in as an underperformer, weakening 0.08% to 73.1 due to the higher crude oil prices.

The ringgit saw firmer bids during the week, up 0.17% to 4.12 while briefly touching a one-month high of 4.117 amid the weakening of the greenback and stronger crude oil price which jumped to a two-year high.

On the data front, the local unemployment rate eased to 4.6% in April compared to 4.7% in March supported by the increase of employed persons to 15.35mil from 15.33mil. Meanwhile, the industrial production and retail sales jumped to an all-time high of 50.1% y-o-y and 55.4% y-o-y, respectively in April, due to low base effects.