FX talkING March 2012 FINANCIAL MARKETS RESEARCH FX talkING ING’s view on the major bullish and bearish currency themes FX 8 March 2012 USD/Majors (1 Jan 08=100) 60 80 100 120 140 160 08 09 10 11 12 60 80 100 120 140 160 JPY EUR GBP Stro nger USD research.ing.com SEE THE DISCLOSURES APPENDIX FOR IMPORTANT DISCLOSURES & ANALYST CERTIFICATION Source: Reuters, ING EUR/CE4 (1 Jan 08=100) 80 100 120 140 160 180 08 09 10 11 12 80 100 120 140 160 180 $/TRY $/BRL $/CNY €/PLN Stronger EM FX Source: Reuters, ING The flood of liquidity from G3 central banks has re-kindled fears of a currency war. EM markets are bracing for an inflow of funds, prompting some into more aggressive rate cuts. We doubt the inter-play of G3 currencies will have much impact on broad investment trends, where high yield will still be favoured. ING FX forecasts EUR/USD USD/JPY EUR/GBP 1M 1.27 Ð 82 Ï 0.82 Ð 3M 1.22 Ð 83 Ï 0.80 Ð 6M 1.22 Î 85 Ï 0.77 Ð 12M 1.30 Ï 88 Ï 0.75 Ð EUR/NOK AUD/USD EUR/CZK 1M 7.40 Î 1.08 Ï 25.3 Î 3M 7.30 Ð 1.08 Î 25.5 Ï 6M 7.60 Ï 1.05 Ð 25.3 Ð 12M 7.90 Ï 1.00 Ð 24.9 Ð USD/RUB USD/BRL USD/CNY 1M 29.7 Ï 1.78 Î 6.30 Î 3M 30.6 Ï 1.84 Ï 6.27 Ð 6M 31.0 Ï 1.80 Ð 6.22 Ð 12M 30.9 Ð 1.75 Ð 6.13 Ð Source: ING FX performance EUR/USD USD/JPY GBP/USD EUR/NOK NZD/USD USD/CAD %MoM 0.6 6.1 0.0 -3.0 -1.0 -0.5 %YoY -4.6 -1.3 -2.1 -4.7 11.5 2.2 EUR/HUF EUR/CZK USD/RUB USD/BRL USD/KRW USD/CNY %MoM 0.5 -0.9 -2.2 2.8 -0.3 0.2 %YoY 7.9 2.3 3.5 7.2 -0.2 -3.9 Source: Reuters, ING FX Strategy Chris Turner Head of Foreign Exchange Strategy London +44 20 7767 1610 [email protected]Tom Levinson Foreign Exchange Strategy London +44 20 7767 8057 [email protected]View all our research on Bloomberg at ING5<GO> 1
Transcript
FX talkING March 2012 FINANCIAL MARKETS RESEARCH
FX talkING ING’s view on the major bullish and bearish currency themes
FX 8 March 2012
USD/Majors (1 Jan 08=100)
60
80
100
120
140
160
08 09 10 11 1260
80
100
120
140
160JPYEURGBP
Stronger USD
research.ing.com SEE THE DISCLOSURES APPENDIX FOR IMPORTANT DISCLOSURES & ANALYST CERTIFICATION
Source: Reuters, ING
EUR/CE4 (1 Jan 08=100)
80
100
120
140
160
180
08 09 10 11 1280
100
120
140
160
180$/TRY $/BRL$/CNY €/PLN
Stronger EM FX
Source: Reuters, ING
The flood of liquidity from G3 central banks has re-kindled fears of a currency war. EM markets are bracing for an inflow of funds, prompting some into more aggressive rate cuts. We doubt the inter-play of G3 currencies will have much impact on broad investment trends, where high yield will still be favoured.
Buffeted by cross currents, but EUR should fall Current spot: 1.33
• The Fed’s promise of low interest rates and the improving global growth story retain the dollar’s status as a funding currency – and has provided EUR/USD with a bid during the global equity rally. Not until the Fed is ready to start talking about withdrawing liquidity will the USD start to benefit from strong US data – and such a discussion looks unlikely to take place before November elections.
• In Europe, the Greek crisis continues to create tail-risks of banking sector pressure, contagion and EMU break-up. Currently concerns focus on Collective Action Clauses and Greek CDS being triggered. In a few months, the concern will move to Greek adherence to the plan and a possible change in French leadership in April/May.
• The macro-political story dictates that the EUR should underperform this year – sending EUR/USD to 1.20 this summer.
• We believe USD/JPY put in a major low at 75.35 last October and an independent re-pricing of the JPY merits USD/JPY moving to at least 85 – even though Fed rates remain anchored near zero. An improvement in the external environment should see Japanese investors start to show renewed interest in foreign asset markets – having kept investments close to home in FY10 and FY11. This should show up in strong demand for foreign investment trusts – or so called Toshin – particularly in April.
• At the same time the BoJ is proving a little more aggressive –finally adopting a 1% CPI target and promising another JPY22tr (5% of GDP) in asset purchases this year.
• Tight fiscal and loose monetary policy plus a current account surplus slumping to mid-1990s levels are all JPY negative.
• UK leading indicators have started to turn a little more constructive, but oil prices are proving a problem. Part of the UK recovery story this year was based on lower inflation and higher disposable income – especially in the second half. Yet Iranian tensions look set to keep Brent and headline inflation higher than expected. And scope for the Chancellor to loosen fiscal policy in the 21 March budget seems very limited indeed.
The BoE continues with QE. In February it decide• d to increase the
• g
size of assets purchased to £325bn from £275bn. This may be raised again in May ahead of the next inflation report and serves as a reminder that the bank rate will be kept at 0.5% into 2013.
EUR weakness could drag GBP/USD to 1.53/55 over cominmonths, but UK safe haven status means GBP is a buy on dips.
• Neither the EUR nor thBoth have policy rates on the floor and are undertaking exceptional measures to stabilise the banking system and promote lending. Despite recent strong gains in EUR/JPY, the Eurozone still has some major headwinds in the first half of the year. Peripheral Europe looks set to undergo a heavy contraction and Northern Europe seems reluctant to commit to any more bail-outs, should peripheral budget deficits prove larger than planned.
• A potential positive for EUR/JPY is progress on the Eurozone firewall ahead of the 20 April G20 summit. EU leaders are discussing merging the EFSF and ESM to create a EUR750bn firewall, which may subsequently trigger increased IMF resources.
• By year-end, EUR/JPY should be heading well above 110.
• We had expected EUR/GBP to be a lot lower by now. Instead the UK is struggling to differentiate itself from the Eurozone, in terms of activity at least any way. BoE Governor King, of course, will not mind that. The BoE feels the re-balancing away from domestic demand/non-tradable to the tradable sector requires a weak GBP.
• However, the credit crunch is a far larger headwind to the Eurozone than it is to the UK and the UK economy should start to outperform later this year.
• At the same time the UK has started to outperform its fiscal targets and the UK’s 5-year sovereign CDS trades comfortably 10bp inside that of Germany. GBP FX reserve weights should be increased this year and we retain sub 0.80 EUR/GBP forecasts.
• The SNB meets to discuss monetary policy on 15 March. Leading the debate will be acting chairman, Thomas Jordan. He looks set to become the permanent replacement to Philip Hildebrand, after a KPMG audit cleared Jordan of any inappropriate FX trading. The SNB will re-assess its 2012 GDP and CPI forecasts of 0.5% and -0.3%, respectively.
• Any upward shift in the 1.20 EUR/CHF floor looks unlikely, following better-than-expected 4Q growth and stubbornly high oil prices. However, the SNB had been expecting EUR/CHF to be rising by now. We think the flood of EUR liquidity from the LTRO may be weighing on EUR/CHF – creating the small risk that the SNB counter-acts this by substantially raising CHF sight deposits.
• Our flat EUR/CHF profile is subject to upward revisions.
• Arguably NOK is superior to all others in the G10 FX space with respect to the three pillars of Safety, Liquidity & Return –delivering all three qualities. This has no doubt helped NOK to be a top performer vs USD year-to-date (6%), taking EUR/NOK to its lowest levels since the start of 2003.
An additional and significant NOK boost comes courtesy of a high Brent oil price, which at US$120/bbl+ threatens a break above its 1Q11 high. Although NOK positive, a supply-side oil price rally will
• benefit the krone less than were it demand-side generated.
EUR/NOK’s plunge to 7.40 means a test of the 2002 record low of 7.20 is not ruled out. Despite being very stretched on a historical basis, NOK’s AAA, oil exporting prowess cannot be beaten. A 14 Source: Reuters, ING March rate cut is not out of the question to combat NOK gains.
• 4Q GDP confirms the Swedish economy slowed far more in 2H11 than thought, resulting in 2011 growth of 3.9% vs 4.5% forecast. A 0.7% Riksbank forecast for 2012 GDP looks high and our sense is that concern locally on the outlook for spending and the labour market is greater than priced by financial markets. The NIER together with Riksbank ‘doves’ look for rates to fall to 0.75%.
• At times it seems the SEK cannot lose – gaining when good EU17 data bodes well for Swedish exports and benefiting from a newly assumed safe-haven status when sovereign stress rises.
• EUR/SEK is historically low. We expect it to base near 8.70 but end 2012 above 9.00. Perhaps the most negative SEK scenario involves a period of EU17 debt calm, but coming too late for the region to avoid recession, spelling trouble for Swedish exports.
• Denmark’s central bank refrained from intervening in FX markets for a second consecutive month in Febr
•
t earlier expectations, Denmark has so
•
uary, suggesting thatupward pressure on DKK has relented somewhat. Recall that in December it bought DKK18bn of FX and cut interest rates 0.3% to combat a EUR/DKK decline to its lowest level since 2004.
Data on the economy is mixed. 4Q GDP rose only 0.2% QoQ, but was offset by a revision higher to 3Q11. Consumption rose a decent 1.3% QoQ. Againsfar avoided recession while targeted stimulus, like a DKK30bn initiative to help small firm access to funding, should also help.
A good chance of renewed EU17 turmoil and a EUR fall means DKK appreciation pressure may well return. The 2002-03 low of 7.42 is within easy reach; the 7.30 trading band floor is not.
• Despite the attraction of a deep debt market, triple AAA status and a commodity focus the liquid CAD continues to underperform. For now investors are placing greater emphasis on yield, on which CAD lags commodity rivals like of AUD, NZD and NOK.
• rates at 1%, but indicated a slightly more upbeat outlook for growth, including private demand, this year (in Jan it forecast 2012 GDP at 2%). This though was not sufficient to alter its neutral policy stance. ‘Persistent strength’ of CAD is again referenced, but Canada’s trade surplus is its best in
•
three years, helped by auto and energy sectors contributing 15% and 25% of exports respectively.
Should US data momentum continue and oil prices maintain an upward trajectory, USD/CAD to 0.95 cannot be excluded.
Volume surge underlines AUD popularity Current spot: 0.82
• The RBA held rates at 4.25% on 6 March, keeping an easing bias. A cut by mid-year is highly contingent on the labour market, which has shed jobs in three of the last four months. Core CPI of 2.5% (the centre of a 1-3% target range) means RBA policy flexibility is the envy of the G10. China’s reduction in its 2012 growth target to 7.5% from 8% will be noted, but not cause undue concern.
• A lopsided economy (in favour of the resource sector) and a very strong AUD are causes for concern. PM Gillard, who last month saw off a leadership challenge, has signalled concern over AUD
• t.
appreciation. An A$8bn 4Q current a/c deficit, driven by a A$12bn income deficit, underlines AUD’s susceptibility to risk aversion.
Recent surveys show AUD volume surging to match GBP andJPY. Despite AUD’s yield advantage, valuation is a big constrain
NZD strength set to scupper rate hike in 2012 Current spot: 0.82
• A year on from the Christchurch earthquake, reconstruction is still to move into full swing. As it does, it will boost growth with upward wage/price pressures possible. For now, with 4Q11 CPI falling sharply to 1.8% YoY from 4.6% and two-year inflation expectations the lowest since 3Q09, the RBNZ is understandably relaxed
• The RBNZ faces difficulty coping with an imbalanced economy. Although rates of 2.50% remain appropriate, it has scaled back future rate hike projections by almost 75bp for the end of 2013 on the basis of a ‘marked appreciation’ of NZD and its ‘detrimental’ impact on the tradable sector.
• NZD still offers a decent yield in G10 terms, but its illiquidity makes it susceptible to any change in the broad risk environment. NZD/USD above 0.90 risks some sort of RBNZ counter meas
Emerging markets EUR/PLN Consolidating while growth stays OK
Current spot: 4.11
3.0Jan08Jul08 Jan09
3.5
4.0
4.5
5.0
Jul09 Jan10Jul10 Jan11 Jul11 Jan12Jul12 Jan133.0
3.5
4.0
4.5
5.0
ING f'cast
Mkt Fwds
• ntary are
•
performance. For the next one-
a trendle year, wh may well push EUR/ ward
Weaker activity data that we expect from March onwards and a gradual softening of the MPC’s current hawkish commethe main risks to the sustainability of the recent PLN appreciation trend. Also, after 1H12, the net FDI position could deteriorate, as we expect slower inflows while the expansion of domestic companies might generate outflows.
Large foreign holdings of PLN-denominated bonds combined witheasier access to euro interbank funding makes the zloty’s fate more interlinked with the treasuryto-two quarters growth will remain solid enough, helping with the process of debt issuance.
EUR/HUF Some progress on NBH law keeps IMF deal hopes alive
Current spot: 293.7
220Jan08 Jul08Jan09
240
260
280
300
320
340
Jul09 Jan10Jul10Jan11Jul11 Jan12Jul12Jan13220
240
260
280
300
320
340
ING f'cast
Mkt Fwds
Source: Reuters, ING
•
• visibly
achedate
Progress on pre-negotiations leading to a new EU/IMF programme remains sluggish.
Crucial disagreements regarding the NBH law have narrowed. Hungary has been backing off in most cases, with theexception of the salary cap, the number of MPC members and the oath that they need to take. For the other contentious items (data protection ombudsman and retirement age of judges), the infringement process has moved into to the next stage.
HUF-supportivHUF is secon
• EUR/HUF started to gain after it could not cross key technical levels at 286-288. We see high volatility remaining and EUR/HUF can continue its near term rise to the 300 level. But we expect a
e IMF agreement to be red only to PLN in its year-to-
EUR/CZK CZK likely to return above 25/EUR in short term
Current spot: 24.82
22
23
24
25
26
27
28
29
30
ul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan1322
23
24
25
26
27
28
29
30
ING f'cast
Mkt Fwds
Jan08 Jul08 Jan09 J
Source: Reuters, ING
• Having temporarily rallied to 24.67/EUR, we have seen the CZK’s recent correction extend over a 3-month horizon, fuelled by a worsening export performance.
• After several months of decline, economic sentiment has stabilised and in February we saw a slight improvement in the Czech PMI from 48.8 to 50.5 – albeit consistent with stagnation of economic activity.
However, over the near term w• e see downside risk to economic activity. Domestic demand is set to remain weak over coming quarters hence the increasing dependency on exports for growth. This represents a factor of vulnerability (with the downside risk for EU17 economic growth in mind). Over a 3-month horizon we
bala
expect the softening of exports and trade nce deterioration.
• GDP expanded by 2.5% in 2011 but contracted 0.2% in QoQ SA terms in 4Q11. The Eurozone contraction hyet and a couple of quarters of contractions remain
as not impacted 4Q11 likely.
• On balance, we see NBR rates on hold on 29 March but risks for another 25bp cut are quite high given the likely decrease in headline and core inflation in February and recent comments from the NBR. With rates already low (rates to 1Y are below 3.5%) and analysts expecting a 25bp cut, such an outcome would probably be neutral for the RON interest and exchange rates.
• The president asked the MPs to find the resources to return wages to levels seen ahead of the 25% cut operated in mid-2010. Most analysts look for some mild fiscal slippages so the market may tolerate such moves.
• Fitch affirmed Croatia’s rating at BBB- with negative outlook. It noted positively initial efforts to lowerstressed that further medium-term fiscal consolidation and
•
o spurred
budget spending but
structural reforms to boost growth are needed to avoid a downgrade.
• A foreign bond may be issued in April according to MinFin.
Modest HRK appreciation has been helped by tight CNB liquidity management and FX-linked sovereign bond issuance (EUR funds partially converted to HRK). The attractiveness of FX-linked bonds increased with the widening spread over Euribor. Improving globalrisk appetite following the ECB liquidity injection alsstronger demand for HRK bonds. HRK appreciation potential is limited by continued corporate FC demand due to deleveraging.
• Despite the fanfare of Serbia winning EU candidate status in February, the soft Dinar has found little status means that official EU entry talks may start later in the
• soft and EUR/RSD continues to
press and warns that intervention may be less
•
reprieve. EU candidate
year. However, as Croatia found out, the difference between starting talks and entering the EU may be seven years.
Instead, the Dinar remains verytrade above 110. FX reserve data suggests the NBS may have sold as much as EUR500m of its EUR12bn FX reserves in January to stabilise the RSD. FX intervention has prompted criticism in the localaggressive after parliamentary elections in May.
A 9% current account deficit and heavy dependence on funding from peripheral countries suggests RSD suffers this year.
Is it taking a breath after strong rally? Current spot: 29.4
• The RUB rallied in February, successfully testing our 1Q12 target of 33.30/basket, but now moving back to the 34 level due to some correction in oil prices and sentiment switching to a risk-off
• A seasonally-strong C/A surplus, fuelled by rising oil prices, and the possible moderation in capital outflows forced the CBR to step into the FX-market more actively in February. It bought US$2.8bn in planned interventions – the biggest volume since July 2011.
We stick to our view that under current oil prices and gradual easing in capital outflows the basket may easily testlevels in 1H12 barring a scenario of plunging global markets. With the election cycle being over now and no deterioration in state-opposition tensions, the new cabinet structure is the only unknown variable. Yet, we
USD/UAH UAH on stable track ahead of October elections Current spot: 8.02
•
• f UAH
•
The relatively small decline in FX reserves by 1.0% MoM in February should not hamper the ability of the Central Bank to control UAH stability in the near term. Our base case assumes the Central Bank will defend the hryvnia until parliamentary electionsin October.
Seasonal factors and the high grain harvest last year will stabilisethe FX market in 1H12 thus reducing the probability oweakness. The risks of UAH devaluation in 4Q12 remain high on the back of an expected negative current account balance and a barely positive capital account.
Gradual and controlled UAH depreciation will be the most preferable strategy for the Central Bank in late 2012 and 2013. Source: Reuters, ING
the last month or so. It gained from 148.6/USD to 147.60/USD by the end of February before stabilizing at around 148/USD recently.
The Tenge was surprisingly immune to the overall improvement in risk appetite and rising energy prices, which could have supported the country’s C/A surplus and overall capital flows balanc
• Recent data on net FX-reserves is supportive. They grew US$1.7bn in February to US$34.8bn with a further increase in the National Oil Fund assets from US$45.5bn to US$47.4bn.
The NBK said it will limit REER volatility due to competitiveness issues, taking into account CIS integration. The latter seems to be the case. By keeping USD/KZT steady the NB
•
K engineered a weaker KZT vs RUB. This should continue to be the case.
CBT moves from “tight” to cautious stance Current spot: 1.78
• In February the CBT lowered its O/N lending rate by 1ppt to 11.5% (while keeping 1-week repo-policy rate at 5.75% and O/N borrowing rate at 5%) given the improving international risk
appetite and a firmer TRY. The CBT’s wording also became more dovish with “tight” stance replaced with a “cautious” one.
It is obvious that CBT’s easing bias is conditional on TRY’s lasting strength (ie, strong inflows). The pace of reserve accumulation far doesn’t justify a fast easing soon (CBT FX reserves stood at c.US$79.2bn as of 6 March, only US$911m higher YTD). Andalong with rising oil prices sentiment towards TRY remains weak.
We still think that downside in EUR/USD along with high oil prices might keep TRY relatively weaker in the near term. But the CBT is likely to remain on guard against excessive moves too.
SARB trapped by high inflation, soft growth Current spot: 7.52
• Unlike other EM nations that are easing policy in 2012, the SARB is somewhat trapped. Cost-push inflation has driven CPI to 6.3% YoY in January and is expected to hold above the SARB’s 3-6% CPI target range all year. That means that rate cuts are unlikely and if activity
actually surprises on the upside, the market might
• start to price rate hikes.
Latest activity data tends to support this view. 4Q GDP was better than expected, private sector credit growth is picking up, as is business confidence.
However, South Africa’s near 4%• current account deficit and high
in Eurozone sentiment could easily see USD/ZAR trade 8.50 again.
FX traded volatility prices serve as a reminder that ZAR is highly sensitive to the external environment. Any sharp deteriorationSource: Reuters, ING
• The issue of Israel undertaking a unilateral strike on Iran reared its head following PM Netanyahu’s visit to Washington. Whether Netanyahu was looking to gain permission for
spark more hawkish rhetoric in a US election year remains to be seen. Presumably if there were a strike it would be well in advance of November US Presidential elections.
• At present major powers are re-trying negotiations with Iran. EU sanctions kick in starting in July and G6 powers start renewed talks with Iran in April. That may deter Israel from a uresponse, but there should be a growing risk premium in ILS.
With inflation under control at 2%, we suspect that Israel, like other EM will want a weaker currency in a year when world trade growth is slowing. BoI should cut another 25-50bp, hitting IL
A less supportive risk appetite environment has hurt the BRL but the currency is also under pressure due to renewed goveefforts to prevent FX strength. Acute IP weakness is seen as direct result of the competitiveness lost due to a strong Real.
Intervention efforts often succeed at triggering a selloff but these tend to be short-lived. A greater focus on reducing the policy rate, as indicated by the recent bigger-than-expected rate cut, could bemore effective however, at reducing the carry’s appeal.
FX inflows should remain supportive as Brazil remains dependent on external financing for longer-term projects, but the risk f additional FX measures and, more importantly, the more dovish
ed material risks, athe BRL could unCB, heighten ly near-term FX nd suggest that Source: Reuters, ING
The USD/MXN was not able to break below the 12.65 despite the relative improvement in global sentiment, but rather remained stubbornly trading nortidentified two local factors behind the MXN tendency towards weaker readings and expect them to prevail.
One, policy incentives ato cushion headwinds from any external downturn and achieve a more balanced growth story for 2012. Secondly, the MXN tends to depreciate from around the end of 1Q in an election year as local investors diversify risk abroad. Our 2012 projections reflect MXN depreciation of 5%+ vs. USD to 13.7 towards 1 July election.
disorderly depreciation isand face no major risk ah
• The CLP selloff over the past week has reduced the risk of FX intervention noise but we continue to see the balance of risks for the currency as less favourable.
Chile is a major oil importer, and the recent spike• in oil prices has
• ere
d consecutive month. Inflation risks are not negligible while bette
materially dented the country’s terms of trade in recent weeks, and the currency has yet to reflect that deterioration.
Talk of FX intervention should die down now that the USDCLP has moved further away from the 460-470 range, which is whthe currency was trading in January 2011, when BCCh announced its last USD-purchasing programme. The bank is alsolikely to keep the policy rate unchanged in March, for a secon
r wa
activity data justifies a relatively neutral to rds future rate action.
• The ARS is entering seasonally favourable territory now, while the government’s insisteoutflows shows no sign of easin
nce on draconian measures to prevent FX g. In fact, changes to the CB’s
charter currently being promoted by the government in Congress points to further government control over FX flows, stricter regulation of banking credit and the elimination of lingering constraints preventing the Treasury from tapping CB reserves.
• over time,
• At least for the near term, BCRA has enough tools to prevent a disorderly FX move, as those measures should be successful at curbing FX volatility and at preventing a drop in FX reserves.
But we expect FX pressures to resume eventually as, the imbalances created by financial repression will become more apparent, taking a toll on economic activity.
• PM Wen’s downgrade of the 2012 real GDP growth forecast to 7.5% from 8%, the forecast for the previous eight years, raised global growth anxiety. We consider this misplaced. GDP growth averaged 10.4% during the period when the forecast w
• We think the authorities recognise that the rapid growth of the previous decade was transitory. We expect the 12th Five-Year Plan (2011-15) to be associated with endogenous re-balancing, including slower average real growth, regression of the current account surplus to 2% of GDP (3.8% estimated for 2011) and the profit rate to 4% of GDP (11.8% in 2011).
• reciation in 2011 pr
is
Official rhetoric on the CNput it close appreciation th
Source: Reuters, ING liquidity conditiorequirement r
•
• st
eting. However, tight n to redu
Synchronised liquidity infusion across Euro zone, UK and Japan coupled with concerted RBI presence in the foreign exchange market has provided substantial support to the INR over the lasttwo months.
However, the 10% surge in crude prices recently amidgeopolitical uncertainties has become the key risk confronting the INR. Also, global uncertainties are far from over, thereby raising doubts over the sustainability of the strength in INR.
• Higher oil prices have further limited the scope for the RBI to adopt easy monetary policy stance anytime soon. We expect RBI to maintain a pause in the forthcoming me
• Bank Indonesia surprised by cutting its policy rates by 25bp in February. Despite the below-expected February CPI inflation BIremained on hold in March.
• We think BI anticipates an inflation spike from oil. The government is contemplating raising administered fuel prices and BI officials estimate that a proposed 1,500/liter price hike would add as much as 2.4ppt to headline inflation, which could put it above BI’s 3.5-5.5% target.
• We think BI operates a low-discretion exchange rate policy that relies more on markets and less on its balance sheet to absorb pressure from hot money. This makes the IDR an underperformer among Asian FX. In risk-on we expect long-dated government bonds, not the IDR, to be the better trade.
• The KRW has long been Asia’s VIX currency; it outperforms among Asian FX in risk-on and viceexternal debt conferred the VIX status on the KRW
ve
•
d PHP.
versa. High short-term .
• De-leveraging after the GFC reduced banks’ short-term external debt. Anemic domestic demand restrains banks’ need to finance asset growth by offshore borrowing. And when they borrow, macroprudential policies encourage it to be long term. These hatemporarily suspended the KRW’s VIX status. We expect it will come back when the credit cycle heats up.
The BOK’s heavy smoothing/sterilization policy coupled with the KRW’s undervaluation make it, with MYR, SGD and THB, top picks in risk-on. We expect this group to underperform TWD and CNY in risk-off and outperform IDR, INR an
• We see a parallel between the Bank of Japan and Bank Negara Malaysia in that both central banks maintain tight monetaconditions to reduce
• 5-2.45 range
ry the threat of macro instability from loose
fiscal policy. Tight monetary conditions increase the likelihood that a nominal shock like the GFC turns into slower trend real GDP growth. Malaysia’s RGDP growth fell short of the 6.0% pre-GFC trend rate in seven of eight quarters since 2010.
• Because of the monetary policy parallel, the adage “never sell a JGB” applies to Malaysian government bonds.
BNM is a heavy smoother/sterilizer and manages USD/MYR with an eye on SGD/MYR, which we think it likes in a 2.3(latest 2.40). MYR is in the group we think will outperform in risk-on and in risk-off will outperform IDR, INR and PHP.
• The BSP, as expected, cut by anotheclawed back the 50bp of hikes of early 2011, which were in response to the rise in headline inflation from the Arab spring oil price increase.
• February CPI inflation was 2.7% YoY, the lowest since Octobe
r 25bp in March. It now has
r
ansport components.
HP will underperform in risk-off.
2009 and well below the 3.3% consensus forecast. The dark clouds in the silver lining were the large, oil-related sequential increases in the utilities and tr
• The BSP might hike if oil causes inflation to accelerate. However, we think it will cut further if oil prices don’t rise rapidly. We expect long-dated local fixed income rather than the PHP to be the top performing asset in risk-on. A lack of interest rate cover is behind our view that P
• January CPI inflation was 4.8% YoY and 0.9% MoM NSA. The seasonal spike in food prices was expected. Hosequential increases in the accomm
wever, the large odation, healthcare and
education components will keep headline inflation elevated for some time. Core inflation accelerated to 3.5% from 2.6%.
We think the data will worry the MAS. Despite app• reciating the Sing $ by over 8% in 2011 – the most in Asia – inflation was over 5%. The January CPI data indicated the man in the street thinks inflation is high.
We think the MAS will consider the safest course would be to maintain policy unchanged in April and we no longer forecast a move to a zero S$-NEER appreciation path
•
. The SGD is among the currencies we expect will outperform in risk-on.
• We think the BOJ’s surprise easing in mid-February caught the CBC by surprise. We view the CBC as targeting JPintervening in USD/TWD. It respond
•
• n is near zero.
oks, if anything,
Y/TWD by s to sudden moves in
USD/JPY by stabilizing USD/TWD. This resulted in TWD appreciating against JPY by the same 4% as USD.
We believe the CBC increased accommodation during the 3Q11 panic associated with the US debt ceiling crisis by depreciating TWD vs JPY. We expect it will use USD/JPY stability to claw back TWD’s recent appreciation vs JPY (latest 0.3661).
Core inflation is negative and headline inflatioTaiwan poses a conundrum: the bond market is saying that GDP growth has slowed but real GDP growth lostronger since the GFC. We think deflation has intensified.
• Industrial production continued to snap back from the 4Q11 flood damage. The contrast with the slow recoverillustrates that real shocks are easier
• turn transitory losses from a real or a demand
• e risk to real
y from the GFC to recover from than
demand shocks. Producers don’t need to worry about being able to sell their output after a supply shock so they quickly restore capacity.
Tight money canshock into permanent ones and slow potential RGDP growth. This may be happening. The fall in NGDP in 4Q11 was the steepest on record, despite the steeper fall in RGDP in the 97-98 Asian crisis.
We think tight BOT monetary policy imparts downsidGDP growth forecasts and to government bond yield forecasts. We reiterate our 3.20% yearend forecast for the 10-year government bond yield (latest 3.43%).
a Butterfly s ll a y RUB upside Using Plu Ca Str teg to hedge EUR/Protecting against a RUB s ff n o ptell-o with a ine m nth o ions hedge Spot ref: 38.95. Nine month ard 40 Vla Pu a a third term as ian ide o f po
ions have not been e to sl te power. While ten oo o r , o se at politics will not l la le l nd f s can see the RU rec to th 0/3t the EUR:RUB bas as ou /U orec put EUR/RUB not r a om nt spot levethe year. But what ha if itio on o number and the ad ation emplo far
aggressive measures to crack down on the opposition? We propose y that protects the corporate with RUB against a sharp sell the , bu s the corpo t enefit if the RUB c es ng od .
Butterfly Plus Call: gs s o stru e ar aturities and this re o c lie ys EUR ll, strike 39.00 in EU mil otio lie lls E p l, strike 40.50 in E m o Cl llst, strike 40.50 in EU ill tio ien s E strike 42.00 in EUR illi ion
tegy is effectively a b ly p n a EU ir of strikes, with t er ari 9. potential maximum f uc 1. b r ucture allows the corporate rtic f EUR/RUBwer through the ye as to U olitical unrest deli ss pi t – ur e worst case rate to UB ld b .50 – ie, the top .00 plus the 1.5 bi e um of truc
pot would be trading a 5 tral es.
alternative, a corporate co d just y a nine month EUR call/RUB put at 42.00, which would cost 1.07 RUB big figures. The worst ective hedge rate the w lative trade off of u a) tte us stra
0 EUR/RUB c) h a rev 0.50.
C urn 4
re detailed discussions on corp ate FX ging strategies, prices and other trade specific requirements, please con t in th first instance you
forw ref: .50. dimir tin h s just won Russ Pres nt. S ar op sition demonstrat large
enough r
seriou y threafl
n Putin’s grasp on sions l k set t emain ur ba case assumes th ad to ge sca capita ight a that irm oil price B app iating wards e 32.4 2.80 area agains ket. B ed on r EUR SD f asts, that would too fa way fr curre ls at the end of would ppen oppos n dem strati ns grew in Putin ministr yed more
an options hedging strategreceivables off in RUB t allow rate o partially b ontinu to stre then m estly
Strategy: All le in thi ption ctur e nine month m structu is zer ost. C nt buput/RUB ca R 10 lion n nal. C nt se UR ut/RUB cal UR 10 illion n tional. ient se EUR call/RUB pu R 10 m ion no nal. Cl t buy UR call/RUB put, 20 m on not al.
Rationale• This stra utterf ositio round a 40.50 R/RUB central pa he out bound es at 3 00 and 42.00.
Thus the cost o this str tuo
re is 5 e
RUB isg figu es. This str to pa ipate i spot
grinds lo ar, but limits the w rst c rate ell R B should p ver ma ive ca tal fligh not o base case. Th sell R wou e 43 strike at 42 g figur maxim cost the s ture, given s way from the 40. 0 cen strik
• As an ul bucase eff n becomes 43.07. Our graph belo highlights the re sing: the Bu rfly Pl Call tegy, b) purely a 42.0 call or merely edging t the p ailing forward of 4
hris T er, London +4 20 7767 1610
For mo or hed tac e r ading and Sales tea the ing xan Schr Fahd El Habti and n, t ialislocal FX Tr ms or follow ; Ale der euder Goedheijt, Michel Hense Produc Spec ts/FX
Research analyst contacts Developed Markets Title Telephone Email
London Mark Cliffe Global Head of Financial Markets Research +44 20 7767 6283 [email protected] Rob Carnell Chief International Economist +44 20 7767 6909 rob.carnell@u James Knightley Senior Economist, UK, US $ Bloc +44 20 7767 6614 james.knightle
+44 20 7767 1610 [email protected] Chris Turner Head of Foreign Exchange Strategy Tom Levinson Foreign Exchange Strategist +44 20 7767 8057 [email protected]
Amsterdam Maarten Leen Principal Economist +31 20 563 4406 [email protected] Martin van Vliet Senior Economist, Eurozone +31 20 563 9528 [email protected] Teunis Brosens Senior Economist, US +31 20 563 6167 [email protected] Dimitry Fleming Senior Economist, Netherlands +31 20 563 9497 [email protected]
Padhraic Garvey Global Head of Developed Markets Debt Strategy +31 20 563 8955 [email protected] Jeroen van den Broek Head of Developed Markets Credit Strategy +31 20 563 8959 [email protected]
Milan Paolo Pizzoli Senior Economist, EMU, Italy, Greece +39 02 89629 3630 [email protected]
Emerging Markets Title Telephone Email
N 424 6464 [email protected] ew York H David Spegel Global Head of Emerging Markets Strategy +1 646 Gustavo Rangel Chief Economist, Brazil, Argentina, Chile, Peru +1 646 424 6465 [email protected]
London Simon Quijano-Evans Head of Research & Chief Economist, EMEA +44 20 7767 5310 [email protected]
Singapore Tim Condon Head of Research & Chief Economist, Asia +65 6232 6020 [email protected] Prakash Sakpal Economist, Asia +65 6232 6181 [email protected]
Turkey Sengül Dağdeviren Head of Research & Chief Economist, Turkey +90 212 329 0752 [email protected] Muhammet Mercan Senior Economist, Turkey +90 212 329 0751 [email protected] Ömer Zeybek Economist, Turkey +90 212 329 0753 [email protected]
Ukraine Alexander Pecherytsyn Head of Research, Ukraine +38 044 230 3017 [email protected] Halyna Antonenko Financial Markets Research Analyst +38 044 590 3584 [email protected]
17
FX talkING March 2012
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