USD: down but not out 3 May 2016 USD: down but not out DBS Group Research 3 May 2016 Mid-quarter FX update Philip Wee • (65) 6878-4033 • [email protected]Asia The relief rally in Feb-Apr won’t likely last Two risks in June – the Fed and Brexit USD is down but not yet out CNY Price-taker HKD Downgraded TWD Recession chills KRW Corporate restructuring SGD Downshifted to neutral MYR Best short-covering THB Strongest rise in foreign reserves IDR Still consolidating PHP Election jitters VND Stable INR Optimism in equities, not INR USD A June hike EUR Wary of Fed hike JPY Backlash AUD Limited upside GBP Brexit is a worst-case scenario 13.1 10.3 5.5 4.5 4.4 2.2 -0.9 -5.6 15.3 12.8 8.7 0.2 -0.3 9.9 5.4 4.6 3.1 2.7 1.6 1.1 -0.1 -0.2 -10 -5 0 5 10 15 20 JPY CAD EUR AUD CHF NZD GBP USD BRL RUB ZAR CNY INR MYR SGD IDR THB KRW TWD VND HKD PHP Most currencies have recovered nicely after the start-of-the-year market volatility % change vs USD, 29 Apr 2016 vs 31 Dec 2015 MAJOR CURRENCIES EMERGING ASIAN CURRENCIES B R I C S * USD is performance of DXY index
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USD: down but not out 3 May 2016
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USD: down but not outDBS Group Research 3 May 2016
DBS forecasts in red. Consensus and forwards from Bloomberg as at 29 Apr 2016
USD: down but not out 3 May 2016
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USD – much depends on the Fed
Global financial markets have stabilized after a tumultuous start to the year. The relief rally in Feb-April was attributed to the Fed, which markets perceive as having turned dovish. By end-Apr, equities and currencies in emerging mar-kets had recovered to levels last seen on 16 Dec, the day the Fed hiked rates. The same can be said for crude oil prices and commodity currencies. The DXY (USD) Index retreated from the top to the bottom of its year long range. Things may be set to change.
In its FOMC statement on 27 Apr, the Fed dialed down the risks that global financial markets posed to the US. A Reuters poll released on 22 Apr saw an in-creased chance for two Fed hikes this year, one in June and another by the end of the year. Unlike the markets above, the US 10Y bond yield has not recovered to 2.30% level seen on 16 Dec. To convince the US bond market of a June hike, Fed officials will need to be less divided. The USD should regain its composure when the 10Y yield rises back into the Fed’s 2-2.5% inflation target range, with the 3M USD Libor increasing towards 0.75%.
The most prominent risk in 2Q16 is the Brexit referendum on 23 Jun. According to the EU Referendum Tracker by YouGov, it is too close to call as to whether voters in the United Kingdom (UK) would choose to remain or leave Europe. Within the UK, the debate has polarized the people, businesses and politicians. Worse, it has become difficult to differentiate between fact and fiction on the merits and consequences of the decision to stay or leave.
The rest of the world was, however, unanimous in their opposition to the UK leaving Europe. The International Monetary Fund (IMF) warned that this would not only severely damage the UK economy but also threaten world economic stability. A recent study by the Organisation for Economic Co-operation and Development (OECD) estimated that a UK exit from the bloc would lower UK GDP 3% by 2020.
Financial markets warned that leaving the Eurozone would result in GBP de-preciating 10-20%. GBP/USD risks plunging below its post-Plaza Accord range of 1.40-2.10 to 1.16-1.31, not far above its 1.05 low seen in Feb 1985. When UK’s status as a leading international financial centre was diminished during the 1992 Exchange Rate Mechanism (ERM) crisis and the 2008 global financial crisis, GBP/USD plunged from 2.00 to 1.40 in about half a year.
Hence, the Bank of England (BOE) is right to consider Brexit the most sig-nificant near-term domestic risk to financial stability. In the event of a credit crunch from an exit vote, the BOE will offer banks three extra funding options to provide banks with extra liquidity in the weeks around the referendum. The European Central Bank (ECB) also pledged in mid-Apr to do whatever was needed to bolster inflation.
Even so, Brexit remains a worst case scenario. For now, consensus including us are maintaining a base case scenario for GBP/USD to range between 1.40 and 1.48 after its recent and brief plunge below 1.40 around end-Feb.
Sentiment is expected to fluctuate with the polls as the Brexit referendum draws nearer. If the leave camp strengthens, risk aversion returns, GBP weak-ness spills over into the EUR, commodity and equity prices fall, emerging and commodity currencies depreciate. Hence, USD would still be underpinned de-pite the Fed being forced to push back its rate hikes again. On the other hand, if UK voters lean towards staying, it’s business as usual, with the Fed paving the ground for rate hikes later this year. Either way, the USD looks supported first.
Asia ex-Japan currencies – the rally is only skin deep
Asia ex-Japan (AXJ) currencies have recovered from their levels at the start of the year. Southeast Asian countries outperformed their Northeast Asian coun-terparts, in line with their better economic performances and outlook.
Looking beyond the prima facie markets, worries over China’s slowing econo-my have not gone away. Rating agencies have put the sovereign debt ratings of China and Hong Kong on negative watch. There is a great sense of urgency to push corporate restructuring in Korea. In Taiwan, the next government’s top priority will be to lead the country out of its recessionary spell. With growth too slow to lift inflation, Singapore ended its appreciation policy in April.
Overall, Feb-Apr was considered a relief rally brought about by the Fed’s cau-tious rate hike stance, the recovery in oil prices and a more stable CNY. With two key risks – a possible Fed hike and Brexit – looming in June, AXJ currencies are unlikely to extend their appreciation much amidst renewed weakness in equities.
Key developments in March-April
Singapore Ended appreciation policy on 14 Apr
Korea Corporate restructuring is top agenda
Taiwan 3 quarters of negative growth
China } Sovereign debt rating outlook loweredHK SAR } to negative by Moody's & S&P
India Liquidity framework overhauled
Indonesia 7D reverse repo is new benchmark rate
Vietnam New leadership is more conservative
Thailand Eased foreign exchange rules
THID
VNPHKRTWMYSGIN
HKCN
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-25
-20
-15
-10
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benchmark stock indices, % YTD
SE Asia recovered best from global panic in January
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% YTD vs USD
Most Asia ex Japan currencies recovered nicely
Key events ahead
May 9 Philippine presidential election
May 20 Tsai becomes Taiwan president
May 26-27 G7 Summit hosted by Japan
Jun15 US FOMC meeting
Jun 23 Brexit referendum in UK
Summer Japan upper house election
Sep 4-5 G20 Summit hosted by China
Oct 1 CNY officially joins SDR
Nov 8 US presidential election
USD: down but not out 3 May 2016
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SGD NEER policy turns neutral – some historical perspectives
In line with our expectations, the Monetary Authority of Singapore (MAS), on 14 Apr, ended its policy to appreciate the SGD nominal effective exchange rate (NEER) policy band at a modest and gradual pace. The shift to a neutral stance means a zero appreciation for the policy band.
Cyclically, this year’s shift to a neutral stance is closer to the 1999-2000 experi-ence than those in 2001-04 and 2008-10. First, the SGD policy turned neutral after a seven-month rise in USD/SGD in 1997 and 2014. Asia ex Japan currencies struggled in both periods from a globally strong USD environment. Monetary policies also favored the USD amongst the G3 economies. Next, 1999-2000 was the only period when a neutral SGD policy ran side-by-side with a Fed hike cycle. When the SGD policy shifted to neutral in 2001 and 2008, the Fed was already deep into a rate cut cycle.
In all three experiences, USD/SGD rose again after the neutral policy started.
New highs were seen in 2002 and 2009 in less than a year after the neutral policy started, following which USD/SGD reversed into a multi-year downtrend. America was fixing its corporate and housing balance sheets then. The Fed ag-gressively eased monetary policy which resulted in a weaker USD and encour-aged capital inflows into emerging markets. China led the growth story in Asia, first by entering the World Trade Organisation in 2001, and a second time, by internationalising its CNY after the 2008 global financial crisis.
Today, two rating agencies, Moody’s and Standard & Poor’s, have put China’s sovereign debt rating on negative watch. They have turned more vigilant on waning fundamentals in Asia and their implications for sovereign/corporate debt and banking sectors. Japan and the Eurozone are, meanwhile, struggling with inflation and have kept the door open for more monetary easing.
With the Fed still on track to raising rates in a weak global environment (like in 1999), the US Treasury Department (USTD) has stepped up efforts to pre-empt one-way bets favouring the USD. To discourage G20 countries from competi-tive devaluation and steer them towards boosting domestic demand, the USTD semi-annual currency report has placed China, Germany, Japan, Korea and Tai-wan under watch for unfair exchange rate practices.
In the end, exchange rates may be entering a consolidation with the USD cur-rently at lower end of a broad range.
The DXY (USD) index is close to finding a bottom with-in its year-long range
• ThestrongUSDhadtoretreatafterrunawayCNYdevaluation expectations intensified currency war fears and threatened global financial markets and the world economy at the start of 2016.
• Two developments were vital in watering downthe monetary policy divergences that lifted the USD over the past 3 years. First, the Fed tempered its rate hike expectations on 27 Jan, citing global risks. Second, G20 countries agreed, on 26-27 Feb, to move away from relying too heavily on ultra-loose monetary policies to support growth.
• Since then,marketshave improvedmeaningfully.As at end-April, most currencies, commodities and equities were trading at levels higher than those seen on 16 Dec, the day of the first Fed hike.
• Hence,itisnotunreasonablefortheFedtothinkabout raising rates again, possibly in June. At its last FOMC meeting on 27 Apr, the Fed no longer saw global economic and financial developments posing risks to the US economy. For the DXY (USD) Index to bounce off the floor of its year-old range, US 10Y bond yield will need to rise back into the Fed’s 2-2.5% inflation target range.
Japanese yen
Downside risks remain for USD/JPY, as do prospects for a consolidation
• TheweakJPYtrendthatcharacterisedAbenomicsbroke down after the Bank of Japan (BOJ) adopted a negative interest rate policy (NIRP) on 29 Jan. Fol-lowing a knee-jerk bounce to 121.68, USD/JPY fell to 106.27 on 29 Apr, its lowest level since Oct 2014.
• Others factors were equally responsible. To re-store confidence after the global market turmoil, the Fed adopted a cautious stance in raising rates. G20 nations agreed on 26-27 Feb to refrain from competitive devaluation. Together, these devel-opments diluted the monetary policy divergences that bolstered the USD over the past 3 years.
• HostingtheG7Summiton26-27May,Japanisun-likely to intervene to curb the JPY’s appreciation. The US viewed the stronger JPY as orderly, and urged Japan to look to domestic rather than exter-nal demand for growth. There is a risk that Japan’s upper house elections in summer may turn into a referendum on Abenomics.
• Ontheothersideoftheequation,theUSDcouldregain its composure if the Fed starts paving the way for rate hike at its next FOMC meeting on 15 Jun.
Projected trading bandCeiling 113.20 114 115 115 116Floor 103.47 104 105 106 107Slope -3.0% a year for JPYWidth ±4.7% around mid
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USD/JPY – back into post-QQE1 price channel
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DBSfConsensus
Projectedtrading range
NIRP
USD: down but not out 3 May 2016
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Euro
Expectations for a Fed hike in Jun is needed to keep EUR/USD within its post-QE 1.05-1.15 range
• The European Central Bank (ECB) delivered freshstimulus on 10 Mar. The refi rate was cut to 0% from 0.05% while the deposit facility rate was pushed deeper into negative territory to -0.40% from -0.30%. Apart from expanding monthly bond purchases to EUR 80bn from EUR 60bn, the ECB will also start buying corporate debt.
• DespitetheslewofECBmeasures,EUR/USDdidnotfall and instead, moved into the upper half of its post-QE 1.05-1.15 trading range. After the CNY-led global market volatility at start-2016, the USD lost its support from monetary policy divergences. The Fed turned dovish in late Jan and adopted a cau-tious and patient stance in hiking rates.
• At the timeofwriting,EUR/USD looks set to testthe ceiling of its 1.05-1.15 range. The US Treasury Department currency report on 29 Apr put Ger-many on a monitoring list for unfair exchange rate practices. Even so, we noted that the last time EUR/USD briefly rose above 1.15 in Aug 2015, it subse-quently returned towards the floor of the range ahead of the Fed hike in Dec 2015. The same could happen again if the Fed paves the way for a hike in
British pound
GBP/USD has been mostly between 1.40 and 1.70 since the 2008/09 global financial crisis
• GBP/USDposteditslowestcloseof1.3868on29Feb, around the time UK bond yields also bot-tomed. The last time GBP/USD fell below 1.40 was during the global financial crisis in 1Q09. GBP/USD has since recovered to 1.4538 on 27 Apr, with consensus setting its sights higher to 1.48 by end-2016.
• ThemostprominentthreattoGBPin2Q16istheBrexit referendum on 23 Jun. If UK voters choose to leave the Eurozone, doomsayers often cited a 20% devaluation the worst case scenario. In a recent letter to lawmakers, Bank of England (BOE) Governor Mark Carney warned of a 10% deprecia-tion leading to higher inflation and lower growth. Based on the latest spot rate, these estimates see GBP/USD falling to 1.16-1.31.
• Whilewedonotdisagreewiththeaboveworstcase scenarios, we recognise Brexit as a political circus too close to call. Until it becomes evident that the UK public is leaning towards an exit vote, our base case outlook favours GBP/USD consolidat-ing between 1.40 and 1.48 for now. We remain mindful that GBP/USD has been confined mostly
Projected trading bandCeiling 1.4750 1.48 1.48 1.48 1.48Floor 1.4000 1.40 1.40 1.40 1.40Slope -0.1% a year for GBPWidth ±-2.5% around mid
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GBP/USD – consolidating between 1.40 & 1.48
DBSfConsensus
US loses AAAECB QE
CNY deval
Fed hikeFed taper
BOJ QQE1
BOJ QQE2
Projectedtrading range
USD: down but not out 3 May 2016
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Chinese yuan
A better-defined ascending price channel has emerged for USD/CNY
• CNYhasbeenappreciatingyear-to-datesinceend-Mar. This was a far cry from the CNY devaluation fears at the start of 2016.
• After China returned from the Lunar New Yearholidays in mid-Feb, USD/CNY has been highly cor-related (93.6%) with the DXY (USD) index. This should not come as a surprise. The basket of curren-cies in the DXY accounted for 70% of the weights announced in the RMB Index launched on 11 Dec 2015. Managing the CNY via a basket of currencies implies that China will no longer be unilaterally driving the CNY weaker.
• WhileChina’seconomyappearedtohavestabilizedlately, worries over longer term structural prob-lems have not gone away. Moody’s and Standard & Poor’s have downgraded, in March, China’s sover-eign debt rating outlook to negative from stable.
• Lookingahead,ChinawillbehostingtheG20Sum-mit on 4-5 Sep. Less than a month later, the CNY will officially join, with effect from 1 Oct, the In-ternational Monetary Fund’s (IMF) Special Draw-ing Rights. There is incentive for China to, not only keep the CNY stable, but also keep the spread be-tween the onshore CNY and offshore CNH narrow
Hong Kong dollar
Too early to tell if USD/HKD won’t return to 7.77-7.80 trading range
• FearsofaChina-ledCNYdepreciationhaveabated,and with it, upward pressures on USD/HKD. Hence, USD/HKD has returned to its previous 2012-15 range between 7.75 and 7.77. This was, however, driven mainly by the Fed’s cautious rate hike stance adopted in late Jan in response to the global mar-ket volatility at the start of the year.
• Asmarketsandeconomiesstabilizeglobally,espe-cially in emerging markets, the odds for Fed hikes to return will increase. The return of Fed hike ex-pectations poses two challenges to the HKD. First, it would lift USD/CNY again via the basket of cur-rencies in its RMB Index. Second, HK interest rates will also rise with their US counterparts.
• Despite the recent improvement in sentiment,Moody’s and Standard & Poor’s put the sovereign debt ratings of China and Hong Kong on negative watch in March. Both agencies were wary of nega-tive spillover effects into the territory from the mainland’s slowing economy and structural chal-lenges.
• Hence, it ispremature to conclude thatUSD/HKDwould not rise back to its 7.77-7.80 range.
Projected trading bandCeiling 7.80 7.80 7.80 7.80 7.80Floor 7.77 7.77 7.77 7.77 7.77Slope 0.0% a year for HKDWidth ±0.2% around mid
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USD/HKD – a higher range in the lower half of band
DBSfConsensus
Fed hike
CNY deval
ECB QE
BOJ QQE2
Fed taper
BOJ QQE1
US loses AAAProjected
trading range
USD: down but not out 3 May 2016
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Taiwan dollar
Unless the Fed turns more dovish, USD/TWD should rise from the floor of our projected trading range
• USD/TWDpeakedat33.835on20 Janandfell toa low of 32.059 on 19 Apr, close to the floor of our projected trading range. With the Fed setting the stage to hike rates in Jun, USD/TWD should be looking to resume its rise from around these levels.
• The Central Bank of China (CBC) has cut ratesthree times since Sep 2015. The discount rate was brought lower by a total 37.5bps to 1.50% by 24 Mar. Taiwan was the only East Asian country where real GDP fell YoY for three consecutive quarters ending 1Q16. With another contraction likely in 1Q16, the CBC may cut rates a third time in Jun.
• Hence, President-elect Tsai Ing-wenwill have herjob cut out for her when she assumes office on 20 May. According to Premier-designate Lin Chuan, Tsai will be tackling key domestic issues such as low salaries, uneven income distribution, youth unem-ployment, annuity reform and the reliability of lo-cal utilities.
To reduce the economy’s reliance on China, the Tsai administration is expected to promote a Go South policy that encourages Taiwanese investors to look for opportunities in South and Southeast Asia.
Korean won
USD/KRW should start to rise again after its latest downward correction
• Between 29 Feb and 19 Apr, USD/KRW fell 9.8%from a high of 1245 to a low of 1123, its lowest level since Oct 2015. USD/KRW should be setting its sights higher after its downside correction. Apart from renewed Fed hike risks and a higher USD/JPY, domestic challenges are mounting in Korea.
• Corporaterestructuringhasbecomethetopprior-ity in Korea. The five problematic sectors identified by the government are shipping, shipbuilding, con-struction, steelmaking and petrochemicals. Labour reforms will be needed to cope with the possible massive layoffs. In anticipation of a deterioration in creditworthiness, Moody’s has downgraded the outlook for the banking sector to “negative” from “stable”.
• With maintaining financial stability a high prior-ity, the Bank of Korea (BOK) turned more dovish at its monetary policy meeting on 19 Apr. Real GDP growth for 2016 was downgraded to 2.8% vs 3.0% previously. CPI inflation is now expected at 1.2% in 2016 vs 1.4% previously. BOK left the door open for more easing. The 7D repo rate has been unchanged at 1.50% after the last rate cut in Jun 2015.
Projected trading bandCeiling 1254 1266 1284 1302 1319Floor 1130 1142 1159 1177 1194Slope -5.6% a year for KRWWidth ±5.5% around mid
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USD/KRW – uptrend intact, correction likely over
DBSfConsensus
Fed hike
CNY deval
ECB QE
US loses AAAFed taper
Projectedtrading range
BOJQQE1 BOJ
QQE1
USD: down but not out 3 May 2016
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Singapore dollar
A broad consolidative trading range has emerged for USD/SGD
• TheMonetaryAuthorityofSingapore(MAS)end-ed, on 14 Apr, the policy to appreciate the SGD nominal effective exchange rate (NEER).
• The neutral policy stance is consistent with theMAS’s dovish inflation outlook for 2016. Officially, headline inflation is expected to remain negative for a second year, with core inflation in the low-er half of its 0.5-1.5% projected range. Hence, it would be appropriate for the SGD NEER to keep to the lower half of its neutral policy band.
• Thecurrentcycleisclosertotheneutralstancepe-riod in 1999-2000, than those in 2001-04 and 2008-10. This was the only period where a neutral SGD policy co-existed with a Fed hike cycle. USD/SGD resumed its uptrend in 2000-01 after a year of con-solidation.
• Conversely,theFedwasalreadymid-waythroughan aggressive rate cut cycle in 2001 and 2008. The US economy was weak and needed China/Asia to play a greater role in supporting world growth. To-day, most believe that the US, rather than China, is contributing more to global growth. Unless the Fed abandons its hike ambitions, USD/SGD is unlikely to reverse its uptrend.
Malaysian ringgit
USD/MYR correction seen limited to 3.80, the level that it was pegged to during the Asian crisis
• TheMYR’s recovery was stronger than we envis-aged in our mid-Mar review. Most of the factors were external. Oil prices returned to $40/barrel, above the $30-35 assumed for the recalibrated Budget 2016. The CNY stabilized and the Fed tem-pered its rate hike expectations.
• In late Mar, USD/MYR broke below its 4.03-4.33range established since Oct 2015. Throughout Apr, USD/MYR consolidated between 3.8430 and 3.9500. Hence, we have tempered the slope of our project-ed trading range for USD/MYR. The new band sees the downside for USD/MYR limited to 3.66-3.72 and a risk for it to return above the psychological 4.00 level should Fed hikes return to the radar screen.
• Inturn,theMYRhasbecomelessundervaluedona real effective exchange rate (REER) basis. Accord-ing to the Bank of International Settlements (BIS), the MYR REER was, as at Mar16, no longer 3 but 2 standard deviation below its average since 1999. The weak REER was probably why Malaysia was amongst the handful of countries that managed to avoid an export recession in 2015.
Projected trading bandCeiling 4.36 4.33 4.29 4.25 4.21Floor 3.86 3.88 3.92 3.95 3.99Slope -4.9% a year for MYRWidth ±5.8% around mid
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Fed hike
CNY deval
ECB QE
BOJ QQE2
Fed taper
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USD/MYR – corrected down to a key support level
DBSfConsensus
Projectedtrading range
USloses AAA
USD: down but not out 3 May 2016
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Thai baht
USD/THB is close to finding a support near the floor of our projected trading band
• USD/THBclosedat34.090on29Apr,notmuchlow-er than the 35.240 level seen at the release of our last quarterly on 10 Mar. Year-to-date, the THB was the 4th best performing currency in Asia ex Japan.
• Sentimentinglobalmarketsimprovedafterabadstart to 2016. The SET index hit a high of 1432 on 21 Apr, effectively back to high from which it fell from during Oct15-Jan16. Thailand experienced the best recovery in foreign reserves. Between Dec15 and Mar16, reserves increased from $127bn to $175bn, the strongest level since May13.
• TheBankofThailand(BOT)haseasedsomeforeignexchange rules. With effect from 18 Apr, retail in-vestors are allowed to invest in structured products linked to exchange rates from local banks.
• Intheend,USD/THBremainsalignedwithitsAsianpeers, especially those in Southeast Asia. Hence, the THB’s recovery since mid-Jan was also attributed to the stabilization in oil prices and the CNY, as well as to tempered Fed hike expectations. We believe that market conditions have stabilized sufficiently for the Fed to consider raising rates again.
Indonesian rupiah
Our projected trading channel for USD/IDR appears to be intact
• Notmuchhaschangedsinceourlastquarterlyre-view on 10 Mar. USD/IDR has been consolidating be-tween 12970 and 13430 after it bottomed at 12950 on 7 Mar. USD/IDR remains well nestled within our projected trading range which is also consistent with the average exchange rate of 13700-14200 as-sumed for Budget 2017.
• TheIDRwasnotablyresilientduringandafterthestart-of-the-year CNY-led volatility. As at 29 Apr, Jakarta stocks and the IDR were respectively, the second and third best performing markets in Asia ex Japan. The return of economic growth to 5% in 4Q15 has increased optimism that structural reforms, namely infrastructure investment, were starting to bear fruit.
• Evenso,Standard&Poors(S&P)appearedhesitantto lift Indonesia’s sovereign debt rating to invest-ment grade at its upcoming review in May. Apart from its commitment to push forward reforms, Indonesia needs to show progress in attracting foreign direct investment and improving fiscal rev-enue. With the US looking to raise rates again, In-donesia cannot afford to rely on external debt to
Projected trading bandCeiling 14303 14425 14606 14785 14964Floor 12678 12800 12981 13160 13339Slope -5.1% a year for IDRWidth ±6.4% around mid
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Fed hike
CNY deval
ECB QE
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Fed taper
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US loses AAA
USD/IDR – correcting down into a narrower channel
DBSfConsensus
Projectedtrading range
USD: down but not out 3 May 2016
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Philippine peso
USD/PHP bounced off the floor of its projected trading range
• Between26 Janand30Mar,USD/PHPfell fromahigh of 48.110 to a low of 45.834. Like its regional peers, the PHP stabilized with the CNY and oil pric-es, amidst a tempered Fed hike expectation.
• Sincethen,USD/PHPhasrecoveredto47.010on29Apr. Externally, the USD found support on renewed expectations for the Fed to hike again in June. Do-mestically, the PHP and the stock market were hurt by election jitters.
• A change in political leadership after the presi-dential election on 9 May is not expected to derail the economy from its 6% growth path in the next couple of years. The World Bank expects the Phil-ippines and Vietnam to lead growth in Southeast Asia this year. The official 2016 growth target of 6.7-7.8% is, nonetheless, considered ambitious.
• Nonetheless, investorsandratingagencieswillbepaying close attention to the economic policies of the next administration. Many of the campaign promises made by the presidential candidates have populist tendencies that could hurt fiscal credibility in the medium-term.
Vietnam dong
USD/VND has been and is expected to remain stable in the upper half of its official trading band
• Sincemovingtoamoreflexibleexchangeratere-gime at the start of the year, the VND has been fairly stable. USD/VND has been trading between 22219 and 22345 in Mar-Apr after it bottomed at 22171 on 28 Jan.
• Theleadershiptransitionwascompletedon9Apr.Under Prime Minister Nguyen Xuan Phuc, econom-ic changes are likely to emphasize stability rather than push for big bang changes. The three main challenges facing the new government are shoring up the banking sector, privatising the state-owned enterprises and managing public debt. In this re-gard, Vietnam needs to keep pushing structural reforms and improve the business environment to attract foreign investment to support growth.
• With its economy recovering, Vietnam is seek-ing to discourage dollarization in the next phase of growth. Local banks and subsidiaries of local banks, with effect from 31 Mar, can only lend for-eign currencies to importers and businesses with overseas investments. Local banks, meanwhile, are eyeing the lucrative overseas remittances business currently dominated by foreign banks. They will need to reform themselves into healthy financial
Projected trading bandCeiling 22497 22497 22497 22497 22497Floor 21842 21842 21842 21842 21842Slope 0.0% a year for VNDWidth ±1.5% around mid
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US loses AAA
USD/VND –mostly stable after CNY deval
DBSfConsensus
Projectedtrading range
USD: down but not out 3 May 2016
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Indian rupee
USD/INR has been rising within a narrow ascending price channel since 2014
• USD/INRhitahighof68.790on26Feb,justbelowits all-time high of 68.850 seen in late Aug 2013. Since then, it had retreated to 66.325 on 29 Apr. The capital inflows during this period was best reflected by the surge in foreign reserves to a re-cord high of $360bn in mid-Apr16 from $346bn in Feb16.
• Despitethis,theINRdepreciated0.3%year-to-dateand remained the worst performing currency in Asia ex Japan this year. The underperformance of the INR should not come as a surprise. The INR is still considered overvalued on a real effective ex-change rate (REER) basis.
• Investor confidence was, however, better repre-sented by the rising Indian stock market rather than the exchange rate. Low oil prices have helped to keep inflation and the trade and current ac-count deficits low. The government has also kept its promise to ensure fiscal discipline.
• TheimprovedlandscapeallowedtheReserveBankof India (RBI) to introduce, in early Apr, a new li-quidity framework to support India’s high econom-ic growth ambitions while building up a war chest
Australian dollar
AUD/USD’s upside limited in the higher half of our projected trading band
• Between18Janand19Apr,AUD/USDappreciatedsharply by 14.7% from 0.6826 to 0.7826, its highest level since Jun 2015.
• SeveralfactorssuggestthattheAUD’supsidewillbe limited from here. Externally, renewed Fed hike expectations could hurt oil prices and Asian curren-cies again. The Reserve Bank of Australia (RBA) has become uncomfortable with the strength of the AUD which it believes could complicate the econ-omy’s adjustment from the end of the mining in-vestment boom. Inflation came in at -0.2% QoQ in 1Q16, its first negative reading since 4Q08.
• Budget2016on3Maywillbecloselywatchedforrisks to Australia’s triple-A debt rating. Moody’s warned on 14 Apr that government debt will con-tinue to increase as long as the planned spending cuts are not accompanied by measures to raise rev-enue. Moody’s believed that the government will not achieve its balanced budget target by 2021. PM Malcolm Turnbull is expected to call an early election on 2 Jul. According to the latest Newspolls, Turnbull is likely to win with a reduced majority.
Projected trading bandCeiling 0.80 0.79 0.77 0.74 0.72Floor 0.64 0.63 0.61 0.59 0.57Slope 3.7% a year for AUDWidth ±-9.9% around mid
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
11 12 13 14 15 16 17
AUD/USD – upward correction becoming limited
DBSfConsensus
US loses AAA
ECB QE
CNY deval
Fed hike
Fed taper
BOJ QQE1
BOJ QQE2
Projectedtrading range
USD: down but not out 3 May 2016
15
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Recent Research
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IN: investment cycle slows 20 Apr 16
ID: the new policy rate 18 Apr 16
IN: improving liquidity management 15 Apr 16
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JP: reflation campaign still has a long way to go 8 Apr 16
CN: what are supply-side structural reforms? 7 Apr 16
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ID: investment eludes 24 Mar 16
Rates: SGS premia compression 21 Mar 16
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Qtrly: Economics-Markets-Strategy 2Q16 10 Mar 16
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Holiday Heresies 2016 7 Dec 15
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