Group Economics
FX Watch
Macro & Financial Markets Research Roy Teo +65 6597 8616
Impact of yuan devaluation
18 August 2015 We have downgraded our Asian currency forecasts for this year by another 2-3%, as the recent devaluation of the Chinese yuan has negative implications for other Asian currencies. This is because other Asian countries’ exports will become relatively less competitive. Overall, we expect the Singapore dollar, Taiwan dollar and South Korean won to be more vulnerable to a weaker yuan, while the Indian rupee should be less impacted. We have added the Singapore dollar into our high conviction list as we expect a cumulative underperformance against the US dollar of around 8% by the end of 2016. More headwinds to Asian currencies outlook
economies are likely to directly or indirectly weaken their
Earlier this month we downgraded our outlook for Asian
currencies to support exports. As we expect further weakness
currencies due to weaker economic fundamentals (for more
in the CNY, the Japanese yen and the euro, the KRW is most
details, please refer to our FX Watch – Weaker Asian FX
vulnerable as South Korea exports have the highest export
published on 6 August). As we have recently downgraded our
similarity to China, Japan and the euro area.
Chinese yuan forecast by 4% (from 6.30 to 6.55 by the end of 2015), a weaker yuan is likely to have negative implications on other Asian currencies as elaborated below.
Export similarity to China, Japan and euro area ESI value
1.0
SGD, KRW and TWD more sensitive to CNY The Singapore dollar (SGD), Taiwan dollar (TWD) and South
0.8
Korean won (KRW) are more sensitive to movements in the
0.6
CNY as these economies have a larger export exposure to China as a percentage of domestic GDP. Indeed, exports from Singapore and Taiwan to China are equivalent to more than 15% of domestic GDP in 2014. Given Hong Kong’s large export exposure to China, we expect the Hong Kong dollar (HKD) to ease towards the upper bound of trading band of 7.85 against the US dollar over time.
0.4 0.2 0.0 KR
HK China
JP Japan
TH
SG
ID
Euro area
Source: IMF, UN Comtrade
Exports to China as % domestic GDP in 2014
*An ESI value of 1 corresponds to identical export structures and zero to
%
completely dissimilar structures.
20%
Exchange rate valuation impact According to the BIS metrics, the CNY represents more than
15%
25% of the KRW and TWD nominal effective exchange rate. Hence due to a weaker CNY, the KRW and TWD exchange
10%
rate valuation will be more expensive ceteris paribus. This will impact South Korea and Taiwan’s export price 5%
competitiveness. The impact is expected to be more pronounced if both the euro and yen are also taken into
0%
consideration. On the other hand, the CNY accounts for 15SG
TW
KR
TH
ID
IN
Source: World Bank, IMF
Export similarity with China: HKD and THB vulnerable According to a study by the IMF, exports from Hong Kong, Thailand, South Korea and Indonesia have higher export similarity to China exports. Hence with the exception of HKD (which is pegged to the US dollar), central banks in these
20% of other Asian currencies’ trade weight.
2
FX Watch - Impact of yuan devaluation - 18 August 2015
CNY, EUR, JPY weights in Asian currencies NEER
Old Asia FX forecasts
%
35
USD/CNY (onshore) USD/CNH (offshore) USD/INR USD/KRW USD/SGD USD/THB USD/TWD USD/IDR
30 25 20 15 10 5
06-Aug Q3 2015 Q4 2015 6.21 6.26 6.30 6.22 6.26 6.30 63.8 65 65 1,170 1,180 1,200 1.38 1.40 1.42 35.20 35.40 35.70 31.70 32.00 32.50 13,500 13,700 14,000
Source: ABN AMRO Group Economics
0 KR
TW
TH CNY
IN EUR
JP
ID
SG
HK
JPY
Source: BIS
Asian currency forecasts downgraded Taking the above into consideration, we have downgraded our year end forecasts for SGD, KRW and TWD by another 3%. Due to a lower trade exposure to China and export competition with China, we have lowered our forecasts for the Thai baht (THB), Indonesian rupiah (IDR) and Indian rupee (INR) by 2%. Though the INR is less exposed to a weaker CNY, we expect sentiment in the INR to remain weak due to the contagion effect from other Asian currencies, which account for around 40% of INR weight in the nominal effective exchange rate. For the KRW, SGD and the IDR we expect a cumulative fall of between 8-10% this year and next year versus the US dollar. We have added our bearish SGD view to our list of high conviction FX picks as it is widely traded and has a lower cost of carry.
New Asia FX forecasts Changes in bold/red
USD/CNY (onshore) USD/CNH (offshore) USD/INR USD/KRW USD/SGD USD/THB USD/TWD USD/IDR
18-Aug Q3 2015 Q4 2015 Q1 2016 6.39 6.50 6.55 6.60 6.45 6.55 6.55 6.60 65.3 66 66 67 1,185 1,200 1,240 1,250 1.40 1.43 1.46 1.47 35.62 36.00 36.40 36.60 32.47 32.80 33.40 33.50 13,788 14,000 14,300 14,400
Source: ABN AMRO Group Economics
Q2 2016 6.65 6.65 67 1,270 1.49 36.80 33.70 14,600
Q3 2016 6.70 6.70 68 1,290 1.50 37.00 33.80 14,800
Q4 2016 6.75 6.75 68 1,300 1.52 37.30 34.00 15,000
Q1 2016 6.35 6.35 65 1,210 1.43 35.80 32.60 14,100
Q2 2016 6.37 6.37 66 1,230 1.45 36.00 32.80 14,400
Q3 2016 6.38 6.38 66 1,240 1.47 36.30 32.90 14,600
Q4 2016 6.40 6.40 66 1,250 1.48 36.70 33.00 14,700
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FX Watch - Impact of yuan devaluation - 18 August 2015
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