Malaysia
Historic events unfolded overnight as in stunning fashion Pakatan Harapan (PH) won the hotly contested which is creating quite the stir with foreign investors trying to decipher the PH new mandate. The thinly traded one-month NDF markets have shot up on the election results above 4.05 in response to the anticipated knee-jerk weakening on Malaysian assets as indicated but the tumult on iShares MSCI Malaysia (NYSE:EWM) ETF.
But indeed, this election surprise has caught some off guard, and with the USD/MYR pulling up 1.75 % in the pre-election run-up, but with the NDF now printing 4.075 the ringgit is now sitting at the bottom of the regional currency pecking order.
Fortunately or unfortunately for some, the local cash markets will be closed May 10 and 11 in conjunction with the special public holiday which should provide time for investors to digest the fallout. Indeed if abolishing the GST and accelerating fiscal spending becomes the new government’s policy cornerstone this could be interpreted negatively given the drain on government coffers, this despite surging oil prices.
The BNM was due today but at this stage, it remains uncertain if they will go ahead with the policy meeting or take the weekend to rethink current policy which could also weigh on MYR sentiment due to indecision.
Currency Markets
Not to over-complicate issues, after the recent wave of USD buying, profit taking has set in ahead of Thursday's key CPI prints which will arguably be the most critical data release for the month. A solid print will underpin recent hawkishness building on the US economic view (and sequential Fed pricing). Whereas, a downside miss could stop the bubbling USD dead in its tracks. In other critical cross-asset markets, US 10y yield is back to 3.0%, WTI is enjoying the lofty levels above $ 71, equities are in the green while gold is in search of its next catalyst.
The correlation between rates and FX is picking up again, and the USD/JPY continues to trade constructively. Suggesting we could finally bound clear of the 110 level on a robust US CPI print.
Oil Markets
Unsurprisingly crude continues to trade actively following the US pulling out of JCPOA as the decision poses significant supply risk in the context of the delicately balanced supply and demand matrix.
But putting today’s API inventories report into context (surprise draw), it confirms the general trend that US inventories are shrinking. Suggesting unless there are some production increases from the OPEC/non-OPEC accord to offset the drop in Venezuelan production, and the expected decline of the Iranian output, prices could be in for a significant leg higher. Of course, there is little indication that the accord will be looking to intervene, but the guessing game will intensify the closer we get to the June 21 OPEC meeting in Vienna.
Gold Markets
Gold traders are desperately looking for a theme after putting the Iran announcement on the back burner for the time being. But there remains enough middle east risk, not to mention the looming Trump-Kim summit to keep gold dips tentatively supported in the face of the resurgent USD. The point, in fact, several sirens have sounded in the Golan Heights earlier, and Israel defense is currently investigating while Israel’s army has ordered all communities there to prepare bomb shelter due to “irregular” Iranian activity in the region. The US Embassy has also issued a travel warning to the area.
However, unless an actual escalation in Middle East tension, gold could be extremely vulnerable to an extension of the US dollar rally.