FX Watch Asian FX recovery to last?
Group Economics Macro & Financial Markets Research Roy Teo +65 6597 8616 Arjen van Dijkhuizen, +31 20 628 8052
9 October 2015 • • • • • •
Less bearish on Asian currencies as cautious Fed supports Asian currencies temporarily Asian central banks likely to ease monetary policy to support and re-inflate economy… …reducing Asian currencies’ carry attractiveness Our new year-end forecast USD/CNY are 6.40 (2015) and 6.55 (2016), respectively Weaker euro, Chinese yuan and Japanese yen will weigh on Asian economies’ exports price competitiveness Indonesian rupiah to underperform other Asian currencies
Cautious Fed to support sentiment in Asian currencies
We now expect the Thai baht (THB) to depreciate further to
Asian currencies have recovered after the US jobs report on 2
36.8 against the US dollar (from previous forecast of 36.4).
October, which revealed that non-farm payrolls were weaker
Our more bearish view on the THB is due to continued
than expected in August and September. We now expect the
sluggish consumer and business confidence which will weigh
US Federal Reserve to delay tightening monetary policy until
on economic growth and leads to rising risks for the banking
June 2016 (from December 2015). This should support
sector (higher NPLs). Political uncertainty will remain a
sentiment in Asian currencies in the coming weeks. Hence we
headwind to foreign investors inflows. In addition, a weaker
have become less bearish on Asian currencies, with the
THB is needed to support exports and re-inflate the economy.
exception of the Thai baht (THB).
Furthermore, we think that it is unlikely that the Bank of Thailand (BoT) will support the THB aggressively given that FX
Recovery in Asian currencies temporary
reserves are now about 10% lower than during the Fed
We expect the current recovery in Asian currencies to be
tapering dry run in mid-2013. The BoT could even aim at
temporary for the following reasons. Reduced fears of capital
replenishing its FX reserves in the coming months. If market
outflows from Asian economies will allow more flexibility for
conditions are conducive in the coming months, a rate cut to
Asian central banks to ease monetary policy to support the
stimulate the economy is also likely.
economy. This will reduce Asian currencies’ carry attractiveness. In addition, a stronger currency is not likely to
IDR to underperform other Asian FX
be welcomed given the current weak exports and inflation
We expect the Indonesian rupiah (IDR) to underperform other
dynamics in most Asian economies. A slowing Chinese
Asian currencies well into 2016. Indonesia’s external
economy (we forecast economic growth of 6.5% in 2016,
imbalances, low real short term interest rates and weak
versus around 7% this year) will provide less support to Asian
economic fundamentals persist. We also expect Bank
exports. Last but not least, a weaker euro, Chinese yuan and
Indonesia to replenish its foreign currency reserves which
Japanese yen will weigh on Asian exports competitiveness.
have declined by about 10% this year.
Chinese yuan at equilibrium; no depreciation?
Asian FX forecasts 09-Oct Q4 2015 Q1 2016 USD/CNY (onshore) 6.35 6.40 6.45 USD/CNH (offshore) 6.34 6.40 6.47 USD/INR 65.1 65 66 USD/KRW 1,159 1,190 1,200 USD/SGD 1.40 1.44 1.46 USD/THB 35.69 36.80 37.00 USD/TWD 32.70 33.00 33.50 USD/IDR 13,478 14,300 14,500
The People’s Bank of China (PBoC) determination to support the Chinese yuan, after the August yuan devaluation caused widespread market turmoil, and our more cautious Fed view have made us less bearish on the yuan. However, we still expect some depreciation, as a weaker yuan helps to inflate the economy and support exports. Our 2015 and 2016 year end USD/CNY forecasts are now 6.40 (from 6.55) and 6.55 (from 6.75). We expect the offshore yuan (CNH) divergence with the onshore yuan (CNY) to be minimal in the coming months as financial markets sentiment improve. However the CNH discount to the CNY will widen next year due to a slower Chinese economy and tighter monetary policy in the US, which is not yet fully priced in. THB forecasts downgraded
Source: ABN AMRO Group Economics
Q2 2016 6.50 6.53 66 1,220 1.48 37.20 33.70 14,800
Q3 2016 6.55 6.57 67 1,230 1.50 37.50 33.80 14,900
Q4 2016 6.55 6.57 67 1,240 1.50 38.00 34.00 15,000