Malaysia: BNM hikes rates again – UOB

Senior Economist Julia Goh and Economist Loke Siew Ting at UOB Group review the latest interest rate decision by the BNM.

Key Takeaways

“As widely expected, Bank Negara Malaysia (BNM) raised the Overnight Policy Rate (OPR) today (8 Sep) by 25bps to 2.50%. This marks the third back-to-back rate hike since BNM started the hiking cycle in May this year as the economy recovered at a stronger pace. To date, BNM has hiked 75bps, which partly reversed the 125bps of rate cuts since the start of the pandemic in Jan 2020.”

“In the latest monetary policy statement (MPS), BNM continues to expect the domestic economy to expand, supported by private sector spending amid the transition to endemicity, positive labour market conditions, resumption of tourism activities and investments. However, BNM cautioned that external demand is expected to moderate amid softer global growth. BNM expects inflation to peak in 3Q22 before moderating thereafter amid abating base effects and easing global commodity prices.”

“BNM highlighted that there is no ‘pre-set course’ and the monetary policy committee (MPC) will continue to assess developments and their impact on domestic inflation and growth. BNM also reiterated that any adjustments will be done in a ‘measured and gradual’ manner. We think BNM may have signalled a temporary pause for rate hikes pending forward-looking growth and inflation dynamics. As such, we maintain our OPR target at 2.50% by year-end, and 3.00% by mid-2023. The next and final monetary policy meeting for the year is on 2-3 Nov.”

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EUR/USD remains unfazed around parity post-ECB rate decision

EUR/USD keeps the daily range around the parity zone.

ECB raised its key rates by 75 bps, matching previous estimates.

The ECB now sees the region’s economy expanding 3.1% in 2022.

The single currency now alternates gains with losses and motivates EUR/USD to keep hovering around the parity region after the ECB raised rates on Thursday.

EUR/USD now focuses on Lagarde

EUR/USD keeps the daily range after the ECB raised the interests rates by 75 bps, as widely expected. That said, the interest on the main refinancing operations, the interest rate on the marginal lending facility and the deposit facility are now at 1.25%, 1.50% and 0.75%, respectively.

In its statement, the ECB predicts that further interest rate hikes are on the table over the next several meetings aimed at undermining demand and tackle upside risks in inflation expectations.

The updated macroeconomic projections now forecast inflation to rise at an average 8.1% this year, 5.5% in 2023 and 2.3% in 2024. Back to the economic growth, the bank’s staff now sees the region expanding 3.1% in 2022, 0.9% in the next year and 1.9% in 2024.

Moving forward, market participants will now closely follow the usual press conference by Chairwoman Lagarde and the subsequent Q&A session, while the speech by Fed's Powell will also grab investors' attention.

What to look for around EUR

EUR/USD now clings to the parity region ahead of the always important press conference by Chair Lagarde after the ECB delivered a widely anticipated 75 bps rate hike.

So far, price action around the European currency is expected to closely follow dollar dynamics, geopolitical concerns, fragmentation worries and the Fed-ECB divergence. The latter, in the meantime, keeps closely following the prevailing debate around the size of the next interest rate hikes by both the ECB and the Federal Reserve.

On the negatives for the single currency emerge the so far increasing speculation of a potential recession in the region, which looks propped up by dwindling sentiment gauges as well as an incipient slowdown in some fundamentals.

Key events in the euro area this week: ECB Interest Rate Decision, Lagarde press conference (Thursday) – Eurogroup Meeting, Emergency Energy Meeting (Friday).

Eminent issues on the back boiler: Continuation of the ECB hiking cycle. Italian elections in late September. Fragmentation risks amidst the ECB’s normalization of its monetary conditions. Impact of the war in Ukraine and the persistent energy crunch on the region’s growth prospects and inflation outlook.

EUR/USD levels to watch

So far, the pair is gaining 0.06% at 1.0005 and faces the next resistance at 1.0090 (weekly high August 26) ahead of 1.0161 (55-day SMA) and then 1.0202 (August 17 high). On the other hand, a drop below 0.9863 (2022 low September 6) would target 0.9859 (December 2002 low) en route to 0.9685 (October 2002 low).

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Dollar Gains to Two-Year High on Safe Haven Flows

The U.S. dollar posted further gains in early European trade Wednesday, trading at two-year highs on safe haven flows as traders digested slowing global growth, raised geopolitical tensions, and the prospect of more tightening by the Federal Reserve.

At 3:15 AM ET (0715 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 102.532, the strongest it has been since March 2020 and on course for its best month since 2015.

Russia announced plans to halt gas flows to Poland and Bulgaria from Wednesday amid a standoff over fuel payments, to the benefit of the safe haven dollar.

Russian President Vladimir Putin has decreed that payment from “unfriendly” buyers should be in rubles, helping support his country’s beleaguered currency, while the European Union has responded that would be a breach of sanctions.

This escalation of tensions has added to the reasons traders have chosen to hold the dollar, with strict COVID-19 lockdown in China likely to hit economic growth in the world’s second largest economy while the Federal Reserve is expected to hike interest rates by 50 basis points in May as it seeks to combat inflation at a four-decade high.

EUR/USD fell 0.2% to 1.0618, dropping to a five-year low, amid fears for Europe's energy security, while the weak GfK German consumer confidence index, projected to plunge to a historic low in May, also weighed.

“April has been nasty for the euro, falling over 300 points. The Ukraine war and the hawkish Fed have been a toxic mix for the euro, as investors have dumped the currency and flocked to the safe-haven U.S. dollar,” said Kenny Fisher, an analyst at brokerage OANDA.

USD/JPY rose 0.5% to 127.81, not far removed from its recent 20-year low with the Bank of Japan set to meet overnight.

This central bank has maintained a very accommodative monetary stance, in direct contrast to the hawkish Federal Reserve, but traders see the risk of policy changes to try and arrest the currency's recent weakness.

GBP/USD edged higher to 1.2577, falling to a fresh 21-month low as last week’s weak retail sales data prompted a rethink of the Bank of England’s tightening cycle.

“Tightening expectations for the 5 May BoE meeting have dropped backed to 29bp from 38bp early last week,” said analysts at ING, in a note.

USD/CNY edged lower to 6.5555, with the yuan helped by data showing Chinese industrial profit growth quickened in March, while AUD/USD rose 0.5% to 0.7159 after Australian consumer prices surged at their fastest annual pace in two decades, spurring rate hike speculation.

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Russia's Putin: Kyiv showing not ready to seek mutually acceptable solutions

Russian President Vladimir Putin held a call with European Council President Charles Michel earlier on Friday and, according to Russian news agency Tass (cited by Reuters).

Putin reportedly told Michel that the possibility of him holding direct talks with Ukrainian President Volodymyr Zelenskyy depends on concrete results of talks between the two sides' negotiating teams. Kyiv is showing it is not ready to seek a mutually acceptable solution, Putin told Michel. 

Michel on Wednesday visited Kyiv and pledged that the EU will give a further EUR 1.5B in military aid to Ukraine. 

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 European Stocks Lower; More Russian Sanctions, Aggressive Fed Weigh

European stock markets traded lower Wednesday, weighed by the likely imposition of new Western sanctions on Russia as well as concerns of aggressive monetary tightening by the U.S. Federal Reserve.

By 3:40 AM ET (0740 GMT), the DAX in Germany traded 0.5% lower, the CAC 40 in France fell 0.5% while U.K.’s FTSE 100 dropped 0.1%.

The United States and Europe are set to announce later Wednesday new sanctions to punish Moscow over alleged atrocities in Ukraine, something Ukraine President Volodymyr Zelensky described as "war crimes" in a speech to the United Nations security council.

The European Commission has already proposed new sanctions including banning Russian coal imports and halting trade worth nearly 20 billion euros ($22 billion), and the White House said late Tuesday that its new measures will target Russian banks and officials and ban investment in Russia.

Russia’s invasion of Ukraine and the sanctions already levied by the West as punishment have roiled markets, causing sharp rises in commodity prices, prompting fears of sharply slower growth this year. 

German factory orders fell 2.2% on the month in February in the runup to Russia’s invasion of Ukraine, falling for the first time in four months and underscoring concerns over weaker growth in Europe’s largest economy. 

Also, dragging on the European markets are set to receive a negative handover from Asia and Wall Street after comments from Fed Governor Lael Brainard raised expectations of aggressive interest rate rises by the U.S. central bank, added to by hawkish comments from Fed Governor Lael Brainard, normally seen as one of the more dovish members of the central bank policymakers.

This puts the focus firmly on the release later Wednesday of minutes from the Fed's last policy meeting, with investors looking for clues over the likelihood of a 50 basis point hike at the U.S. central bank's next meeting in May.

In corporate news, Volkswagen (DE:VOWG_p) stock fell 2.7% after the German carmaker’s finance chief Arno Antlitz told the Financial Times that the company is likely to ditch many models by the end of the decade to concentrate on producing fewer cars overall but more profitable premium vehicles.

Vestas Wind Systems (CSE:VWS) stock fell 1.4% after the Danish wind turbine said that it would withdraw from Russia, where the firm has two factories.

Oil prices edged higher Wednesday, with traders having to balance supply concerns on the back of likely new sanctions on Russia with fears of weaker demand after a build in U.S. crude inventories and a prolonged COVID lockdown in Shanghai, the Chinese financial hub.

U.S. crude oil supply data from the industry body American Petroleum Institute, released late Tuesday, showed a build of just over 1 million barrels for last week, compared with the 3-million-barrel draw reported the previous week.

Investors now await official numbers from the U.S. Energy Information Administration later in the session for confirmation.

By 3:40 AM ET, U.S. crude futures traded 0.9% higher at $102.86 a barrel, while the Brent contract rose 1% to $107.67. 

Additionally, gold futures fell 0.4% to $1,919.50/oz, while EUR/USD traded 0.1% lower at 1.0891.

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