Ringgit stays weak at RM 4.71 - RM 4.73, leading to outflows

What’s the real culprit of the MYR depreciation?
Team Halogen
October 9, 2023

Market Movements

Global Macro Highlights

💥 The yield on the 10-year US Treasury is likely to hit 5%, according to Bill Gross
💼 JOLTS job openings jump to 9.6 million in August vs. 8.8 million expected
📈 U.S. jobless claims increase slightly to 207,000 for the week
➕ US Nonfarm Payrolls soar by 336,000 in September vs. 170,000 forecast
Source: Bloomberg

The rise in US treasury yields this week was the focus of global markets, and risk assets traded weak over the period. Starting on Tuesday night with the release of US JOLTS data, which measures job vacancies in real time, JOLTS reported a stellar 9.61 million job vacancies vs. an expected 8.8 million forecasted. Given the Fed’s focus on the labour market, good news for the economy is clearly bad news for financial assets in this regime. 

10 year treasuries spiked to a high of 4.88%, while 30y yields hit 5.01% on Wednesday during the Asian session. Across the board, rates globally spiked in sympathy. We heard about what seemed like capitulation by Asian real money managers as they were forced to sell paper into the yield spike, thus fueling the rally in yields.

Source: Bloomberg

With that capitulation move, traders started to fade the rally tactically, and set up a broad retracement going into Friday’s Non-Farm Payroll report. Wednesday’s ADP employment data was weaker than expected, but has never been that good of a leading indicator for NFP. Friday’s NFP report came in at 336k jobs reported, vs. an expected 170k. Immediately, SPX500 futures dropped 40 points. However, the market managed to find its feet, and US equities staged a broad rally into Friday’s NY close, despite the fact that treasury yields continued to stay at lofty levels.

Malaysia Market Highlights

🇲🇾 Ringgit seen remaining soft at RM4.71-RM4.73 range against US dollar next week
Source: Bloomberg

Malaysian Capital Markets | We hate to say we were right

We quote from our writeup last week: “Moves in the MYR bond market seem to suggest that the correction, from what has generally been a great 2023 so far, is not done. Any good financial textbook will tell you that a bond investor will seek refuge from rising yields by keeping their duration short, and a great way to express that view is the Halogen Shariah Ringgit Income Fund…”

The quiet moves in the 39th week of 2023 were merely a short respite as more pain came in week 40 with losses in government bonds, corporate bonds and the KLCI amid the 10-year US Treasury moving closer to the dreaded 5.0% yield mark. 

Source: Bond Pricing Agency Malaysia, Yahoo Finance

Weaker MYR leading to outflows

Foreigners sold RM4.4bn of Malaysian debt securities in the month of September; the second month of selling in a row. 

Although foreigners were net buyers of equities (+RM0.6bn), this results in an outflow of funds for Malaysia and one of the likely culprits for MYR depreciation. 

This came amidst higher yields in the US, which made MYR yields look unattractive by comparison. 

In related news, BNM’s foreign reserves fell US$2.4bn m/m to US$110.1bn at end-Sep. This brings the year-to-date decline to a total of US$4.6bn, whittling the ratio of reserves to imports down to 5.1 months and the ratio of reserves to short-term external debt back to 1.0x.

Crypto Market Highlights

📉 Ether futures ETFs see low volume in first-day trading
🇸🇬 Coinbase awarded full major payment institution licence from Singapore's MAS
⚖️ SEC’s motion to appeal loss in Ripple case is denied

This clearly is an ongoing theme, which we keep pointing out. Despite the turmoil in traditional finance, cryptocurrency majors seemed totally unaffected by the ongoing worries of higher interest rates. Bitcoin and Ethereum started the week extremely buoyant, with a large move early Monday morning as optimism of the ETH futures ETF launch carried over. However, during the NY session on Monday, volumes in ETH futures proved lacklustre, and this took the wind out of crypto’s sails. 

Following a rally to 1750, ETH rapidly sold off to trade back in the familiar range of 1600 to 1680. Bitcoin on the other hand  has seen quite a bit of support, with price being unable to dip below 27000.

As an additional blow to anti-crypto regulation, the SEC was denied its interlocutory appeal request in its case vs. Ripple. While this doesn’t portend the end of judicial proceedings, it does set the SEC back in terms of timelines and perhaps weakens its case in current ongoing hearings. XRP rallied to a high of 54 cents, but was unable to make much headway there. In terms of impact, more was felt in some of the altcoin majors such as MATIC that were deemed securities by the SEC. This probably indicates that traders have moved on from the Ripple vs. SEC narrative, and are turning their attention to more current matters instead.

What we are monitoring for the week ahead

What does all of this mean? Our thoughts

Debt funding requirements in the US seem to be ramping up, and are one of the less talked about causes of Treasury yields shooting up of late. These are not going away in the next few months, so we foresee a tender upcoming period for the MYR bond market that may possibly spill over into equities. At the same time, the 10-year MGS yielding 4.09% may look attractive to some domestic investors but could easily be outshined if the 10-year US Treasury reaches 5%. We maintain our call for keeping duration short, and a great way to do that is to invest in the Halogen Shariah Ringgit Income Fund as proven by the results of this week. This is because the short duration of the fund limits the capital loss in the rising yield environment, while being able to reinvest at higher rates as the short-dated papers mature.

That said, Friday’s recovery in US equities and a broad weakening of the Dollar might set the stage for further retracement this week. The strong buying into Friday’s NY close wasn’t accompanied by much of a narrative, and was in stark contrast to the NFP headline data (though notably, hourly earnings missed slightly). This speaks more towards a structural and technical move, with perhaps traders covering their risky asset shorts and squeezing out latecomers with weak hands. Against the backdrop of October’s seasonality, we expect a possible moderation of the risk-off sentiment that’s plagued markets this whole week, despite yields not very firmly off their highs. More importantly, we’ll be watching movements in the yield curve.

On that note though, the weekend’s developments around an escalation between Israel and Palestine might weigh on any attempt by risk assets to rally. The US and its allies in the region seem ready to meddle once again. While perhaps geopolitically less is at stake compared to the Russia/Ukraine conflict, stability in the Middle East remains key to keeping inflationary pressures under wraps. We’ll be watching this space closely.

In crypto, we think that Bitcoin’s price range has reset slightly higher, to now trade in a 27000 to 28500 range. The 28500 to 29000 range still remains a strong resistance area to overcome though - recall that this was identified as strong support in the wake of the June ETF announcement. It will likely take another delay by the SEC come the mid October deadlines to send BTC back to a lower range once again.

We do think that scenario is more likely than not. The SEC losing its attempt at an interlocutory appeal vs. Ripple increases the odds of that happening. The options market also agrees with that view, with that market pricing in lower chances of that event happening over the deadline. Implied volatility prices and call option skews only start increasing going into the end December expiry.

As another cautionary note, we don’t think that crypto’s lack of correlation to traditional markets would hold if the Middle East conflict morphs into something more major than we’ve seen thus far. At the start of the Russia/Ukraine conflict in March 2022, Bitcoin was being touted as a safe haven asset (being digital gold) while also allowing Russians and Ukrainians alike fast access to a global payments network. Bitcoin’s price held up initially, but macro forces eventually reared their ugly heads, and the crypto as a whole took a severe beating. Arguably, there is no bubble this time, but we think it’s likely that the same playbook could apply here once again.

The rest of the crypto major pairs seem content to drift inside current ranges, with perhaps the only major story being the price recovery in the Avalanche token (AVAX). Previously, the token looked to be the weakest of the major alternative L1 networks, trading below $9 at levels not seen since the 2020 boom cycle. Interest in the seemingly dead network was revived late in the week with the launch of a new social network on Avalanche, Stars Arena, which itself is trying to bring the friend.tech wave from the Base chain to Avalanche. AVAX soared, hitting a high of 11.88 on Binance before Stars Arena got hit with an exploit, draining the contract and causing interest to evaporate quickly. 

The activity in AVAX certainly took quite a lot of people by surprise, and it does seem that short sellers were squeezed in the run up to this weekend’s highs. A look at on chain activity seems to indicate that there was also insider activity during this period, with a large buyer of AVAX two weeks ago managing to exit one day before Stars Arena exploit. Once again, we caution investors about blindly chasing price action, and to choose their investment vehicles wisely.

Thank you for reading and we’ll see you next week!

Team Halogen

Disclaimer: The information, analysis, and viewpoints presented here are intended solely for general informational purposes and should not be construed as personalised advice or recommendations for any specific individual or entity. For personalised investment decisions, individual investors are advised to consult their licensed financial professional advisor. The opinions expressed by the Manager are based on certain assumptions or prevailing market conditions, and they are subject to change without prior notice. This material is being distributed for informational purposes only and should not be regarded as investment advice or an endorsement of any particular security, strategy, or investment product. While the information provided herein may include data or opinions from sources believed to be reliable, its accuracy and completeness are not guaranteed. Reproduction of any part of this material in any form or reference to it in other publications is strictly prohibited without the express written permission from Halogen Capital Sdn Bhd. Halogen Capital Sdn Bhd and its employees assume no liability regarding the use of this material or its contents.

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October 27, 2023
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