Macroeconomics

• An eventful Friday and weekend. Looking at the diverse newsflow, though none so new strictly speaking, can we smell something out of it?
• Though fear was somewhat alleviated, the Greek problems have not been resolved, and sovereign risks were once again heightened with Moody's saying the US and UK have moved "substantially" closer to losing their AAA credit rating as cost of debt service rose.
• At the other end, in the press conference concluding the China National People's Congress, Chinese Premier Wen Jiabao shrugged of calls by the US and other trading partners for a stronger CNY, saying that they "oppose all countries engaging in mutual finger-pointing or taking strong measures to force other nations to appreciate their currencies", a very strong statement we opine. Now, it is up to everyone's interpretation if our Asian brother is giving our western brother a smack on the face; and does this offer more signs of a shift from the "west" to the "east"? Premier Wen further commented that they will "continue to reform the renminbi exchange rate regime and keep the renminbi basically stable at appropriate and balanced level", meaning any revaluation in the CNY will likely be small.
• Back to data, surprised strength in retail sales including ex-auto sales which suggest a sustained consumer sector, shall give the US economy a further lift, and this actually overshadowed the unexpected drop in consumer confidence, where sluggish job market was to be blamed.

Forex

• USD was weaker Friday as investors' worries about Greece's debt crisis eased. Expect USD to start to shed its funding currency status.
• EUR reached its strongest in more than 5 weeks against JPY as speculation of an EU bailout for Greece boosted demand for the single currency. However, we maintain our near term bearish stance on the EUR.
• GBP climbed vs USD on speculation this year's drop was excessive as a report showed house prices rose at the fastest pace in 7 years, mitigating concern about the economy. However, GBP is likely to retain its downward tendencies but BOE minutes may give the currency a temporary lift.
• JPY softened vs its major counterparts as concern Greece would default eased and European and US reports signaled the economic recovery is accelerating. Expect Yen to weaken as appetite for higher yielding assets increases.
• AUD rose to 7-week high as concerns that Greece might default eased, boosting demand for riskier assets. Expect AUD to stay bid.
• MYR to rose to 19-month high on speculation the central bank will normalize interest rates further this year in response to faster economic growth. However, technical pull-back has set in and further consolidation is expected in the near term before any push lower.

Fixed Income

• UST traded flat on Friday as investors were mainly on a wait-and-see strategy. Last Fridy's reports which showed mixed data about the US economy, including unexpected drop in consumer confidence and better than expected retail sales were hardly movers for the UST market. We opined investors were mainly awaiting next week's key event i.e. FOMC rate decision and inflation date, which is expected to have more influence in dictating yield movements. Meanwhile longer dated 30s were seen gaining higher on Friday, carrying over from a successful $13bn 30-year notes auction sale on Thursday. Its yields dipped 4bps lower, settling at 4.627% level.
• Back home, MGS traded firm with yields relatively unchanged, with only the 10s shedding 2bps to reach 4.22% level. Investors were mainly preparing for the influx of RM3.5bn 7.5-year MGS which was auctioned on Friday, serving as the new 7-year benchmark. Demand came in strong, reporting a bid-to cover of 2.24x with an average yield of 4.012%. Trading volume for the other benchmarks came in at RM133m, RM481m and RM125m for the 3s, 5s and 10s respectively.