Fx watch weaker asian fx aug 15

Group Economics

FX Watch

Macro & Financial Markets Research Roy Teo +65 6597 8616

Weaker Asian FX outlook

Arjen van Dijkhuizen

6 August 2015 We have become more bearish on several Asian currencies, as domestic growth and exports have disappointed. Against this background central banks in South Korea, Taiwan, Indonesia and Singapore are expected to be more tolerant of a weaker currency. FX intervention to weaken currencies is also a policy option. We expect the central banks of China and Taiwan to cut the policy rate later this year to stimulate the economy. The Monetary Authority of Singapore is also likely to shift the current modest appreciation of S$NEER to neutral in the next monetary policy decision in October. On the other hand, we expect the Bank of Thailand to slow the pace of depreciation in the baht given concerns related to the pace of the recent fall.

We have left our moderately bearish forecasts for the Indian rupee and Chinese yuan unchanged.

BoK more tolerant towards weak KRW

October 2007. As a result, we expect the central bank to be

The South Korean won (KRW) has declined faster than

more tolerant of a weaker exchange to stimulate exports and

expected and has now fallen below our year-end target. We

inflate the economy. A combination of a policy rate cut and

expect further KRW weakness going forward. This was

intervention to weaken the currency are likely policy tools.

triggered by several developments. The Middle Eastern

Indeed the central bank’s FX reserves in June have risen to

Respiratory Syndrome (MERS) outbreak since May has

the highest level since November 2014, implying that the

dampened domestic consumption significantly. As a result the

central bank has been intervening in the currency market to

Bank of Korea (BoK) last month lowered this year's economic

weaken the TWD.

growth forecast from 3.1% to 2.8%. The Finance Ministry has also announced some measures to recycle some of the country’s current account surplus. Given the uneven global recovery and strong KRW, exports have contracted yoy since

TWD and KRW real effective exchange rate TWD REER level

KRW REER level

120

140

exchange rate (REER) has eased in recent months, it is still

115

130

2% stronger than at the end of last year. Hence, we judge that

110

the beginning of this year. Though the KRW real effective

120 110

the central bank will be more tolerant of a weaker exchange rate, which will fuel speculators to use the KRW as a funding currency. However we do not expect the BoK to loosen monetary policy further as core inflation has remained steady in recent months. In addition there are encouraging signs of a

105

95 Jan-05

recovery in consumer confidence and businesses’ optimism as

90 80 Jan-07

Jan-09

TWD REER (lhs)

the government has declared a de facto end to the outbreak of the MERS and announced a fiscal stimulus package last

100

100

Jan-11

Jan-13

Jan-15

KRW REER (rhs)

Source: BIS

month (also see our South Korea Watch, Growth subMERSion, published in July).

BoT to slow pace of THB depreciation We are also more bearish on the Thai baht (THB) as the

More bearish on the TWD – rate cut not priced in

recent drought is likely to reduce economic growth by as

We have downgraded our Taiwan dollar (TWD) forecasts. A

much as 0.5pp, according to the central bank's estimate. The

rate cut has become more likely later this year, which is hardly

50bp rate cut earlier this year has also failed to stem the

priced in by financial markets. Domestic growth in Taiwan has

decline in consumer confidence, which is at the lowest level

disappointed. Economic growth in the second quarter

since May last year. In addition, exports have underperformed

expanded 0.64% yoy, the slowest pace since Q2-2012. This

the government's target and inflationary pressures remain

was due to weak exports and tepid domestic demand. The

muted. Hence a weaker exchange rate is necessary. Looking

outlook remains challenging as consumer confidence remains

ahead, as inflation has remained below the central bank’s

weak and export orders continue to contract. In addition,

target of 1-4% for seven consecutive months, there is a case

headline inflation has remained in negative territory for six

for a looser monetary policy. However given the Bank of

months and core inflation is edging further away from the

Thailand’s concerns on the pace of depreciation in the Thai

central bank’s 2% target. In addition, the TWD real effective exchange rate in June strengthened to the highest level since

2

FX Watch - Weaker Asian FX outlook - 6 August 2015

baht (THB), a rate cut is likely only if the outlook for economic

width of the policy band if volatility in currency markets

growth and inflation does not improve in the coming months.

increases when the Fed tightens monetary policy later in September, which is not fully priced in by financial markets.

Weaker IDR- slow GDP and decline in FX reserves

However a shift of the level of policy band lower is not likely as

The Indonesian rupiah (IDR) has reached our Q3 target of

a recession or deflation is not envisaged.

13500 against the US dollar. We see further weakness in the IDR as domestic growth has continued to disappoint and the

S$NEER and core inflation

terms of trade have deteriorated. The government also now

S$NEER level

expects the budget deficit to widen to 2.2% of GDP, compared

125

Reverse scale %

-1

to an initial forecast of 1.9%. In addition, the current account deficit is also expected to widen in the second quarter.

0

120

Furthermore, we judge that the central bank’s capacity to defend weakness in the IDR is less given that FX reserves

1 115 2

have declined by 7% since February this year. Current FX reserves are at the lowest level since June of last year and

110

3

cover about eight months of imports. Last but not least, foreign ownership of local government bonds has increased by more

105 Jan-10

than 1pp to almost 40% in June. Hence the IDR is vulnerable

Jan-12

Jan-13

S$NEER (lhs)

to reversal of capital flows when monetary policy in the US tightens later this year.

4 Jan-11

Jan-14

Jan-15

Core inflation YoY% (rhs)

Source: MAS

Thailand and Indonesia FX reserves

Indian rupee and Chinese yuan forecasts unchanged

USDb

We keep our moderately bearish forecasts for the Indian rupee

200

(INR) and Chinese yuan (CNH) in place. The INR is expected to decline further as short term real yields have become less

160

attractive as inflation remains sticky. The strong INR remains a headwind for exports, which have contracted for seven

120

consecutive months. The Reserve Bank of India is also

80

expected to lean against gains in the INR. We also expect the 40

yuan to decline as the currency is expected to trade at the

0 Jan-05

weaker end of the trading band when the latter is widened Jan-07

Jan-09

Thailand FX reserves USDb

Jan-11

Jan-13

Jan-15

Indonesia FX reserves USDb

from +/-2% to +/-3% later this year. The strong currency has pressured corporate profits and export growth, while reducing inflationary pressures.

Source: Bank of Thailand, Bank Indonesia

New forecasts MAS to shift S$NEER policy to neutral in October

6 Aug

Q3 2015

Q4 2015

Q1 2016

Q2 2016

We expect the Monetary Authority of Singapore (MAS) to shift

USD/KRW

1170

1180

1200

1210

1230

its policy for a current modest appreciation of S$NEER to a

USD/TWD

31.70

32.00

32.50

32.60

32.80

neutral policy at its next meeting in October. This is because

USD/THB

35.20

35.40

35.70

35.80

36.00

economic growth in the first half of this year has averaged

USD/IDR

13500

13700

14000

14100

14400

2.25% yoy, the slowest pace since 2009. In addition, core

1.40

1.42

1.43

1.45

USD/SGD

1.3830

inflation has been lower than the MAS forecast of 0.5-1.5% for

USD/INR

63.80

65

65

65

66

three consecutive months from April to June, while headline

USD/CNH

6.22

6.26

6.30

6.35

6.37

Q4 2016

inflation has been negative for eight consecutive months now.

6 Aug

Q3 2016

In addition the impact of expected higher food price inflation

USD/KRW

1170

1240

1250

could be offset by the recent decline in oil prices. Furthermore,

USD/TWD

31.70

32.90

33.00

wage inflation could rise more slowly as the resident

USD/THB

35.20

36.30

36.70

unemployment rate rose by 0.3pp to 2.8% in the second

USD/IDR

13500

14600

14700

quarter of this year. The strong exchange rate is also weighing

USD/SGD

1.3830

1.47

1.48

on core inflation. Indeed, we expect the MAS to lower the

USD/INR

63.80

66

66

upper bound of its economic growth and inflation forecast in

USD/CNH

6.22

6.38

6.40

October. We also do not rule out that the MAS may widen the

Source: ABN AMRO Group Economics

3

FX Watch - Weaker Asian FX outlook - 6 August 2015

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