FX Watch
Group Economics Macro & Financial Markets Research
5 July 2016
Revision in Asian FX forecasts Roy Teo Senior FX Strategist Tel: +65 6597 8616
Asian currencies have been resilient post Brexit…
…but weak Chinese yuan and central bank easing to weigh on Asian
roy.teo@sg.abnamro.com Arjen van Dijkhuizen Senior Economist Tel: +31 20 628 8052 arjen.van.dijkhuizen@nl.abnamro.com
currencies
Moderate downgrade 2016 and 2017 CNY forecasts to 6.8 and 7.0
Bad loan concerns to weigh on INR – forecast downgraded
Less pessimistic on SGD and IDR in 2016
Asian FX to remain resilient in 2017
Asian currencies have been resilient post Brexit… Asian currencies have been relatively resilient post Brexit for several reasons. Financial markets have come to terms that a contagion to the Eurozone is less likely. In addition, Asia exports to the UK account for 1-3% of total exports in 2015 and hence the trade impact on Asian economies is small. Asian central banks have also been reportedly supported their currencies through interventions. Some economies such as South Korea have also announced fiscal stimulus measures to support the economy. Last but not least, monetary policies globally are also likely to be more accommodative. Financial markets have priced out rate hikes in the US and more monetary stimulus in both the Eurozone and the UK this year. That has supported sentiment in Asian currencies. …weak Chinese yuan and central bank easing to weigh on Asian currencies Having said that, we continue to expect a slight weakening in Asian currencies in the coming months. For starters, the Chinese yuan is expected to be weaker than our previous forecast (please see below for more details). This is expected to put some dampening effect on Asian currencies. Central banks in Asia are also likely to further ease monetary policy later this year given the subdued inflation and economic growth outlook. Moderate downgrade of 2016 and 2017 CNY forecasts to 6.80 and 7.00 After the unexpected Brexit vote on June 24, we think that the People’s Bank of China (PBoC) is likely to allow a moderately weaker yuan (CNY) against the USD. Both the euro and sterling, which together account for about 25% of the CFETS CNY trade weighted basket, are now expected to be weaker after the Brexit. Hence, a weaker yuan against the USD is likely, to keep the CNY relatively stable within the currency basket. We have
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FX Watch – Revision in Asian FX forecasts 5 July 2016
lowered our 2016 year end CNY forecast from 6.70 to 6.80 against the USD. The offshore yuan (CNH) is likely to trade at a discount to the onshore yuan given that the former is more driven by market forces and sentiment. However we do not expect the PBoC to tolerate large divergence between CNY and CNH, as the yuan is expected to be included in the IMF SDR basket on 1 October this year. The authorities are also likely to allow onshore banks to trade in the CNH market, which should also limit large enduring divergences between the onshore and offshore yuan rates.
USD index and USD/CNY fixing rate Index level
USD index and CFETS CNY trade weighted index Fixing rate
100 98
Index level
6.70
102
6.65
100
6.60
98
6.55
96
6.50
94
6.45
92 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16
96 94 92 Jan-16
Mar-16 USD Index (lhs)
Source: Bloomberg, CFETS
May-16
Jul-16
USD/CNY fix (rhs)
USD Index (DXY)
CFETS CNY TWI
Source: Bloomberg, CFETS, ABN AMRO
In 2017, the gradual depreciation of the yuan against currencies of China’s trading partners will continue in our view, although we still think that the authorities will not tolerate a large-scale weakening of the yuan versus USD. We expect China’s gradual slowdown to continue, with growth falling from 6.5% in 2016 to 6% in 2017. The deleveraging and restructuring process will take several years. China’s current account surplus is expected to narrow as the economy rebalances towards more consumption. Outward direct investments are also likely to increase at a faster pace than foreign direct investments. Hence the yuan may face some pressure as a result. However the yuan inclusion in the SDR basket and opening up of onshore bond market to international investors are likely to provide some support to the yuan. As China policy makers continue to open up the capital account, volatility in the yuan is expected to rise. However we expect the central bank to manage large swings in the currency. Our 2017 year end USD/CNY forecast of 7.0 would imply about 3% depreciation of the CNY CFETS trade weighted index in 2017 and almost 10% decline over the period of 2015 to 2017. Bad loans concerns to weigh on INR – forecast downgraded We also see Indian rupee (INR) weakness. The government has shortlisted four candidates to replace Reserve Bank of India governor Rajan when his term ends in September. Our assessment of this is that the government acknowledges that Rajan had a great reputation with markets (also see our India Watch, A quick Q&A on Rexit, published earlier this month). As the government does not want to lose the carefully builtup credibility in monetary policy, they realise it is important not to select a governor which would be perceived ‘overly dovish’. While it is still an early call, we view that this may imply that the new governor is unlikely to materially change the current monetary policy bias of taming inflation. However, in that respect the composition of the newly established Monetary Policy Committee will also play an important role. A relief recovery in the INR
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FX Watch – Revision in Asian FX forecasts 5 July 2016
may materialise as a result. However firmer oil prices (upside risk to inflation in India) and continued concerns on state banks’ bad loans will continue to weigh on the INR. All in all, we expect a somewhat weaker INR by end-2016 and in early-2017. We have raised our 2016 year end USD/INR forecast from 67 to 69. Less pessimistic on SGD and IDR in 2016 On the other hand, we have become slightly less pessimistic on the Singapore dollar (SGD) in the coming months, as the SGD has some safe haven characteristics given that Singapore has a net positive international investment position and enjoys an AAA rating. We have lowered our 2016 Q3 USD/SGD forecast from 1.38 to 1.36. Nevertheless, we still expect the SGD to depreciate versus the US dollar by the end of this year, as the Monetary Authority of Singapore (MAS) is likely to lower the centre of S$NEER policy band in the next scheduled monetary policy meeting later this year in October. The S$NEER is now trading at stronger levels when the MAS last eased policy earlier this year in April. This is likely to weigh on core inflationary pressures, notwithstanding a more subdued growth outlook domestically and globally. Our year end USD/SGD forecast remains unchanged at 1.40. In addition, we have become more positive on the Indonesia rupiah (IDR) given that the tax amnesty which was recently passed by the Indonesia parliament is expected to result in about IDR 560 trillion (USD 42.5bn) of funds back onshore and boost government revenue by about IDR 53 trillion, based on the central bank’s estimates. The size is significant given that the projected inflow of USD 42.5bn is about twice the magnitude of Indonesia’s current account deficit in 2015. In addition, economic growth is projected to be boosted by about 0.3pp. Our 2016 Q3 USD/IDR forecast has been lowered from 13,400 to 13,100. Looking ahead, the IDR is still likely to depreciate modestly later this year (13,400) as Bank Indonesia (BI) is unlikely to tolerate strong gains in the currency given continued weak exports growth. There is also room for BI to ease monetary policy further to support the economy given low inflation and improving outlook in the IDR. Given the recent decline in foreign currency reserves, BI is also likely to replenish their foreign currency reserves during periods of strength in the IDR.
Strong S$NEER to weigh on core inflation
Markets are more optimistic on IDR
Index level
Level
127
15000
126
14500
125
14000
124
13500
123
13000
122
12500
121 Apr-15
Jul-15
Oct-15
Jan-16 S$NEER
Source: MAS, ABN AMRO
Apr-16
Jul-16
Non-deliverable forward points
1200
900
600
12000 Jan-15
300 Jul-15
USD/IDR (lhs) Source: Bloomberg
Jan-16
Jul-16
6mth USD/IDR NDF points (rhs)
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FX Watch – Revision in Asian FX forecasts 5 July 2016
Asian FX to remain resilient in 2017 Looking ahead, we expect Asian currencies to face several opposing forces in 2017. In general, as the fall-out from Brexit for emerging Asia is likely to be limited and most Asian economies are quite resilient, Asian FX will probably do relatively well among EM currencies in case of global risk aversion. A gradual recovery in commodity prices is also expected to improve sentiment in emerging markets including Asian currencies. However Asian central banks are unlikely to tolerate strong gains in their currencies given weak exports and inflation outlook. On the other hand economies such as Singapore, South Korea and Taiwan are likely to be more impacted as China slows. We have recently lowered our forecasts for these and other Asian economies, see our Asia Watch Brexit fall-out limited published last week. Hence Asian currencies are vulnerable to a weaker Chinese yuan and rising interest rates in the US (we expect the Fed to raise rates by 75bp in 2017 which is not priced in by financial markets). As shown in the graphs below, Asian currencies’ correlation with the Chinese yuan has increased since 2015. This is due to the yuan being more market determined and reflective of domestic economic fundamentals. The Singapore dollar is also most vulnerable to firmer interest rates in the US.
Asian currencies’ sensitivity (weekly data from 2015) Correlation
Asian currencies’ sensitivity (weekly data from 2011) Correlation
0.6 0.5 0.4 0.3 0.2 0.1 0 -0.1 -0.2 -0.3
0.6 0.5 0.4 0.3 0.2 0.1 0 -0.1 -0.2 -0.3 KRW
SGD CRB index
Source: Bloomberg
TWD CNY
THB
IDR
INR
SGD
2y US yields
KRW CRB index
THB CNY
INR
2y US yields
Source: Bloomberg
ABN AMRO Asian currency forecasts
05-Jul Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 USD/CNY (onshore) 6.67 6.70 6.80 6.85 6.90 6.95 7.00 USD/CNH (offshore) 6.68 6.73 6.83 6.88 6.93 6.95 7.00 USD/INR 67.3 68.0 69.0 70.0 70.0 70.0 69.0 USD/KRW 1,153 1,165 1,165 1,180 1,180 1,160 1,150 USD/SGD 1.35 1.40 1.36 1.42 1.42 1.40 1.38 USD/THB 35.11 35.00 35.00 35.50 35.50 35.00 34.50 USD/TWD 32.22 32.80 33.00 33.50 33.50 33.00 32.50 USD/IDR 13,138 13,100 13,400 13,500 13,500 13,200 13,000 Source: ABN AMRO Group Economics
TWD
IDR
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FX Watch – Revision in Asian FX forecasts 5 July 2016
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FX Watch – Revision in Asian FX forecasts 5 July 2016