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MONEY MARKETS :S. Korea pumps in dollars, Malaysia yields up

Posted on: February 24, 2009

Reuters – Tuesday, February 24

* S.Korea injects dollars, won cross-currency swaps down

* Malaysian yields higher, rate cut expectations dim

* Euroyen futures implied rates up as Japan year end nears

By Vidya Ranganathan

SINGAPORE, Feb 24 – South Korea’s central bank pumped in dollars through its weekly swaps on Tuesday, while Japanese yen implied yields in euroyen futures crept up as both markets prepared for possible stresses in the weeks ahead.

Dollar funding rates remained unchanged in Asia on Tuesday, trading within ranges they have been in all of this month and continuing to be shackled by worries over the U.S. administration’s new plans to stress test and infuse capital into banks.

Japanese yen interbank rates <ZTIJPY=> likewise barely budged, indifferent to a host of fresh funding programmes the Bank of Japan announced last week, and focusing more on a potential increase in funding needs for banks and businesses next month, the close of the financial year.

The 3-month TIBOR <ZTIJPY=> was at 0.7 percent on Tuesday, at levels it has been around since early January.

Euroyen 3-month March futures <JEYH9> were at 99.32, down a point from Monday, implying 3-month rates will be 0.68 percent by March. That implied yield has been climbing from 0.64 last week.

“Overall the balance of risks remains skewed to somewhat higher term rates going into fiscal year end, when corporate funding needs are typically strong,” Barclays Capital’s Stefan Liiceanu said in a note.

Concerns about Japan’s fiscal year end needs have been spilling into South Korean markets, for fear Japanese investors might pull more money out of an economy already grappling with a heavy chunk of maturing foreign loans.

The Bank of Korea provided local banks with $4 billion in 84-day loans on Tuesday, using its credit line with the U.S. Federal Reserve, and at a rate of 1.4398 percent which is higher than dollar rates in Singapore or London.

Demand for these dollar loans also appeared heavy, with the central bank receiving bids for $5.25 billion in the auction.

Cross-currency dollar/won swaps rose to minus 1.6 percent from minus 2.4 percent late last week, implying banks onshore had to pay 0.8 percentage points less to swap won into dollars.

Yet, market participants expect some volatility in the months ahead as South Korea tries to refinance or rollover an estimated $194 billion in foreign debt maturing within a year.

“We do not expect a March crisis,” said David Mann, a strategist at Standard Chartered Bank.

“Funding concerns are there but the situation is not in our view as bad as it was in Sept/Oct 2008. The rollover rate of FX loans has been rising.”

In Singapore, 3-month dollars <SIUSDD=ABSG> were quoted at 1.24357 percent, barely changed from 1.24147 percent on Monday in Singapore but still far wider than the 3-month overnight-indexed swap <USDOIS> at 0.22 percent.

Elsewhere, in Malaysia, rising bond and bill yields revealed a growing conviction among investors that central bank Governor Zeti Akhtar Aziz signalled a pause in monetary easing when she said earlier this month that rate cuts had been front-loaded.

The central bank meets on Tuesday to review rates, but the market is divided on whether the policy rate, already at 2.5 percent, will be cut further.

Meanwhile, the auction of a 3.5-year bond this week and fears of increased funding needs for a government trying to pump-prime the economy have driven yields and steepened the yield curve.

Since Zeti made her comments on Feb. 11, three-month bill yields have risen to 2.38 percent from 2.25 <MY3MT=RR>. The spread between benchmark 5 and 10-year Malaysian government securities has widened to 75 bps from 18 at the end of January.

“We are not expecting any change in rates this time around, but what counts is keeping alive rate-cut expectations,” said Suresh Kumar Ramanathan of CIMB Investment Bank.

“At the moment the debt market is at a standstill following Zeti’s comments a fortnight ago, but if today’s communique leans on the dovish side, we expect MGS rally to pick up momentum.”


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