Group Economics
EM FX Weekly
Macro & Financial Markets Research Roy Teo & Arjen van Dijkhuizen +65-6597 8616
Steady or weaker yuan?
18 May 2015 • • •
Emerging market currencies supported Steady or weaker Chinese yuan? Bank Indonesia expected to remain on hold next week
Emerging market currencies supported
exceeding foreign investment into China. Third, though there
Most emerging market currencies benefited as sentiment
has been encouraging signs that China’s transition towards a
towards the US dollar was generally weak. The Turkish lira
more domestic led economy is in progress, a weaker
strengthened to the strongest level in one month as political
exchange rate remains necessary to support exports given the
uncertainty eased ahead of next month's elections. Firmer oil
uneven pace of the global recovery. Fourth, the yuan is no
prices and a better than expected trade balance supported the
longer undervalued in our view. Fifth, the yuan’s attractive
Russian ruble. However gains were limited after the Bank of
carry is expected to be less supportive as monetary policy
Russia said that they would buy USD 100-200 million daily to
divergence between the US and China widens later this year.
boost reserves. On the other hand, the Brazilian real declined
Last but not least, we expect the authorities to allow the
as the weak growth and high inflation outlook is expected to
exchange rate to be more reflective of economic fundamentals
persist.
and market determined in order to achieve their aim of the yuan being included in the SDR basket. Nevertheless they will
Steady or weaker Chinese yuan?
likely not tolerate a sharp yuan deprecation.
The Chinese yuan was resilient against the US dollar this week as financial markets have priced in the recent interest rate cut.
BI expected to remain on hold next week
Market bets that China will allow a weaker yuan declined as
Since the disappointing Q1 GDP print on 5 May 2015, the
the currency remained steady against the US dollar in the past
Indonesian government has urged the central bank to cut
two months. However we think that a currency easing bias is
interest rates to stimulate economic growth. However we think
already underway as the yuan has declined by about 3% on a
that Bank Indonesia is likely to keep interest rates unchanged
trade-weighted basis since the middle of March.
on 19 May given that inflation remains above target. In our view, the central bank is unlikely to allow a sharp depreciation
CNY nominal effective exchange rate
in the IDR given that less than 30% of Indonesian companies’
Level
new foreign currency corporate debt is hedged. We see some
135
room for monetary easing this year when inflation starts to fall in late 2015 and if the current account remains under control. We maintain our view that the IDR is likely to ease lower
130
towards 13,300 against the US dollar later this year. 125
ABN AMRO emerging market currency forecasts
120
115 Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Source: BlS, ABN AMRO Group Economics
We maintain our view that the yuan will decline against the US dollar later this year for several reasons. First, we expect the US dollar to recover as economic growth in the US picks up and financial markets anticipate Fed rate hikes. Second, outward investment is expected to rise this year, possibly
USD/CNH USD/INR USD/KRW USD/SGD USD/THB USD/TWD USD/IDR USD/RUB USD/TRY USD/ZAR EUR/PLN EUR/CZK EUR/HUF USD/BRL USD/MXN USD/CLP
13-May 6.21 64 1,099 1.33 33.70 30.67 13,185 50 2.67 12.05 4.10 27.50 307 3.02 15.33 604
Q2 2015 6.25 63 1,100 1.36 32.80 31.50 13,100 53 2.80 12.00 3.95 27.50 310 3.30 15.25 630
Q3 2015 6.30 64 1,130 1.39 33.20 32.00 13,200 52 2.85 12.20 3.95 27.50 315 3.25 15.50 630
Q4 2015 6.35 64 1,130 1.40 34.00 32.10 13,300 50 2.85 12.20 3.90 27.50 320 3.20 15.50 630
Source: ABN AMRO Group Economics
Q1 2016 6.40 64 1,140 1.42 34.50 32.30 13,400 48 2.85 12.20 3.85 27.40 320 3.20 15.25 635
Q2 2016 6.41 65 1,150 1.43 34.80 32.50 13,500 47 2.85 12.20 3.85 27.25 325 3.10 15.25 640
Q3 2016 6.43 65 1,150 1.44 34.80 32.80 13,600 46 2.85 12.20 3.85 27.00 325 3.10 15.00 645
Q4 2016 6.45 65 1,150 1.45 34.80 33.00 13,700 45 2.85 12.20 3.85 26.75 330 3.10 15.00 650