Asia monthly update September Flying high

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1 Asia monthly update September Flying high Anders Svendsen, Chief EM Analyst 21 September 2017 Natalia Kornela Setlak, Graduate

2 Update on Asia and selected Asian countries 3 Financial forecasts 20 Contacts & Disclaimer 23 Nordea Markets Singapore Branch Magnus Karlsson Jussi-Pekka Lyytinen Daniel Aagaard Pedersen Fredrik Fremberg Nordea in Asia Corrado Lillelund Forcellati Antti Oksala Research in Asia Amy Yuan Zhuang, CFA (maternity leave) Research coverage of Asia Anders Svendsen Tuuli Koivu Natalia Kornela Setlak

3 Executive summary Asian currencies strengthen as markets shrug off the political risks in the Middle East, on the Korean Peninsula and the natural catastrophes hitting the US. For now, at least. Since the last Asia Monthly, we have seen all the Asian currencies appreciating against the USD except for a slight setback in the PHP and the VND. The probability of a December rate hike from the Fed though still in our forecast has been reduced, and the renewed USD strength story based on relative liquidity effects has become less straightforward as an agreement on the debt ceiling has been reached. That might fuel further gains in the Asian currencies in the remaining part of the year, despite the fact that they have already been star performers this year. USD/CNY had moved sharply down until the PBoC changed the reserve requirements on 8 September. A generally weaker USD will support the CNY as well as most other Asian currencies going forward, but in the short term the CNY is too strong. Also, see our most recent China Economic Outlook. As long as the political risks do not materialise into full-blown military conflicts, denting the risk-on sentiment for good, the Asian FX should continue to perform well. Our relatively bearish picks this year: KRW and PHP. Our relatively bullish picks this year: THB and MYR. 3

4 Asia: Good economic momentum, slightly higher price pressures Chinese trade data disappointed once again, but most of the PMIs remain at elevated levels compared to the years before and the positive momentum continues. Only South Korea and Thailand saw the August PMI levels fall into contraction territory. After the first rate cuts in Asia this year in India and Vietnam, Indonesia has followed suit, cutting its policy rate to 4.50%. We expect to see further easing from the Bank of India later this year, possibly as early as the October MPC meeting. Inflation rates have edged higher overall, but remain well under control with the highest reading recorded in Indonesia, which still fell short of 4.0% y/y. 4

5 Asian FX: Stronger, stronger, stronger Despite elevated political risks in the Middle East region, increased US-North Korea tensions and natural catastrophes hitting the US, nothing seems to be changing the prevailing risk-on mode for more than a few days. After a somewhat bad start to the summer, the Asian FX continues its rally on improved global economic momentum, declining market expectations of a December Fed hike and a weaker dollar, which remains around a 2½-year low. Our Q4 expectations of renewed USD strength were based on a relative liquidity story with timing becoming a vague issue due to the debt ceiling agreement having been reached earlier than expected. That might further fuel another string of gains in the Asian FX. 5

6 China: Robust growth with increasing consumption Chinese growth has surprised on the upside this year and we expect that GDP growth will remain above 6.0% y/y in with a gradual decline in growth each year. The main driver of growth in coming years will be increasing productivity, which still lags the developed countries and the shift from an investment- to a consumption-based economy. Credit growth continued to grow strongly during the summer despite policies focused on tightening. After the top leadership change at the October Party Congress, the politicians might focus even more on tightening reforms, preventing potential bubbles. Read our full publication on China Economic Outlook here. 6

7 CNY: Renminbi rally The CNY has strengthened significantly since the early summer. As a consequence, the PBoC made two changes on 8 September: the reserve requirements for foreign banks CNH deposits in China and for FX forward trading were lifted. So far, those changes have stopped USD/CNY at an 18-month low of just below A generally weaker USD and capital inflows had pushed USD/CNY too low. Looking ahead, we expect USD/CNY to head a bit higher still. The trade-weighted renminbi is most likely too strong for the Chinese authorities at current levels of around 95, which the changes to the reserve requirements also indicate. Read our full publication on CNY: Still too strong here. 7

8 HKD: Slight strengthening after months of depreciation A solid performance of the Hong Kong economy and uplifted global macro momentum finally led to appreciation of the pegged HKD. The 12-month spread between HK and US rates remains around -0.4% point level, but as Fed market pricing continues to be overly dovish, it might widen further. Forward points fell sharply once again and the current 12-month forward rate remains close to USD/HKD 7.75 the lower band of the peg. We believe that the USD/HKD peg will be kept for now, but might be restructured to include CNY in the basket in the medium to long term. 8

9 India: Growth slowdown The GST and demonetisation reform from November 2016 might have had a more negative effect on Indian growth than initially expected as the Q2 GDP estimate again fell short of expectations, recording only 5.7% y/y and the PMIs continuing to surprise on the downside. The first inflation reading after the rate cut was a bounce up on higher food prices and future RBI moves remain data dependent. We expect the bank to cut its rate once more this year as inflation and growth remain low, while the INR has stabilised. The long-term potential in India remains intact as the current efforts put in reforms are expected to pay off in the future. Read our full publication on India Economic Outlook here. 9

10 INR: More appreciation ahead in the years to come The INR has gained more than 6% against the USD this year. Strong foreign inflows into Indian assets have been the key driver behind the appreciation. In our view, the INR rally this year looks sustainable but has not much further room to run, especially if the RBI delivers another cut this year in line with our expectations and the USD regains its footing due to scarce liquidity, which remains our baseline despite some uncertainty about the timing. However, the medium- and long-term potential remains intact and thereby we see further INR gains in the coming years as huge foreign interest is likely to be maintained since the economic conditions are supported by ongoing reforms. 10

11 IDR: BI cuts rate to provide stimulus The IDR appreciated sharply, breaking out of the range it has traded in since mid-january. Inflation has levelled off slightly below the mid-point of 4%, enabling the BI to cut its policy rate by 25bp. A cut might lift growth, which still falls short of its potential while exports are surging. The GDP level is expected to pick up slightly going forward with the Indonesian government expecting overall broadbased GDP growth of 5.4% y/y in We expect the currency to remain stable as any sharp appreciation will be used to accumulate FX reserves. In case of strong capital outflows the bank will intervene directly. 11

12 KRW: Resilient to geopolitics Both the economy and the currency prove quite resilient to elevated geopolitical risks. The impact of the elevated tensions on the Peninsula was mostly seen in the negative effect it had on tourism. North Korean provocations have a rather short-lived impact on financial markets, temporarily inducing safe-haven flows and higher volatility. USD/KRW continues to range trade as it has done since late January. Trading in a tight range of will continue unless tensions unexpectedly escalate. Recently, the UN approved further sanctions on North Korea, which was not followed by any military action from the northern neighbour. 12

13 MYR: Finally edging somewhat down After a summer period of a stable USD/MYR rate, the cross has finally embarked on a downward path following oil price and USD/CNY appreciation. The Malaysian economy is surprising on the upside this year, and inflation remains contained, keeping the large share of foreign bond investors in the market in check. Markets expect the BNM to stay on hold for the time being, as it should accommodate economic recovery. We see much further potential for the downside of USD/MYR as it is sharply lagging commodity prices, USD/CNY and the yield spread. USD weakness expected next year will also support MYR strengthening. 13

14 PHP: Mounting risks The economy grew by 6.5% y/y in Q2, which is a slight improvement on Q1, but still a significant slowdown compared to the level of 7.0% y/y seen last year. Growth is mainly driven by strong domestic demand. However, risks are mounting government spending is high, imports are increasing at a sharp pace and the current account balance keeps worsening. The inflation rate remains around the 3.0% target level, so the BSP is expected to stay on hold for longer, even though some fine-tuning of the policy could be on the cards. We expect the PHP to continue depreciating against the USD as the outlook for the peso remains gloomy. 14

15 SGD: Appreciation might come to a halt According to the MAS, the Singaporean economy is expected to grow by 2.5% this year. Higher growth has primarily been driven by higher exports, but now there are also signs of improvement in domestic demand with rising retail sales. Despite the slight improvement in domestic demand, the MAS is expected to keep its policy rates on hold and a neutral stance at its next meeting in October. The SGD continued appreciating partially due to a weaker USD. The appreciation seems to have gotten a bit too far as markets expect some depreciation in

16 THB: Growing stronger and stronger The Thai economy continued to grow, posting growth of 3.7% y/y in Q2 the strongest since Exports remained strong, while private investments still showed negative growth rates. The BoT left its policy rate at 1.50% at its recent meeting, in line with expectations. Domestic demand is still weak, while exports and public spending are driving GDP growth. Inflation is expected to continue at a low level, but easing does not seem to be on the cards either. The BoT recently increased its efforts to discourage foreign investors from chasing higher yields on local bonds. This is likely to somewhat dampen the degree of further appreciation of the THB. However, we still believe USD/THB will edge down due to improving fundamentals. 16

17 TWD: Small upward correction to come Economic growth is matching expectations with strong exports being the main driver behind the positive trend. Taiwan s new PM William Lai promised to focus on reforming the energy industry, the labour market, the pension system and the tax system. The inflation rate remains at a low level and the central bank is expected to stay on hold for longer. Foreign equity inflows levelled off at around USD 17.5bn, while the TWD continued appreciating against the USD last month. USD/TWD seems to have gotten a bit ahead of itself and markets expect a minor upward correction towards USD/TWD in the near future. 17

18 VND: Range-bounded A narrow USD/VND range was maintained and the VND is likely to continue its stable course in the remaining part of this year. Growth is expected to be slightly lower than the target this year, but it is expected to recover as credit growth accelerates due to rate cuts and higher oil revenues. Despite robust economic growth, a high fiscal deficit and public debt falling just a tad short of the legal cap (65% of GDP) remain the major risks in the medium term. The strong FDI flows to Vietnam and the divestment process of the state-owned companies continue, implying some upcoming improvement in the key accounts. 18

19 Update on Asia and selected Asian countries 3 Financial forecasts 20 Contacts & Disclaimer 23

20 Financial forecasts FX rates Exchange rates vs EUR Exchange rates vs USD M Sep17 3M EUR/USD EUR/JPY USD/JPY EUR/DKK USD/DKK EUR/SEK USD/SEK EUR/NOK USD/NOK EUR/GBP GBP/USD EUR/CHF USD/CHF EUR/PLN USD/PLN EUR/RUB USD/RUB EUR/CNY USD/CNY EUR/INR USD/INR EUR/BRL USD/BRL

21 Financial forecasts rates Monetary policy rates, % 10-year government benchmark yields, % Country M Country M United States United States Euro Area Euro Area United Kingdom United Kingdom Sw itzerland Denmark Japan Norw ay Denmark Sw eden Norw ay Poland Sw eden Russia Poland Czech Republic month rates, % Hungary Country M Russia United States Brazil Euro Area China United Kingdom India Denmark Norw ay Sw eden Poland

22 Update on Asia and selected Asian countries 3 Financial forecasts 20 Contacts & Disclaimer 23

23 Nordea in Asia Corrado Lillelund Forcellati Antti Oksala Nordea Markets Singapore Branch Margnus Karlsson Jussi-Pekka Lyytinen Daniel Aagaard Pedersen Fredrik Fremberg Research in Asia Amy Yuan Zhuang, CFA (maternity leave) EM Research Anders Svendsen Tuuli Koivu Natalia Kornela Setlak Nordea Markets is the commercial name for Nordea s international capital markets operation. The information provided herein is intended for background information only and for the sole use of the intended recipient. The views and other information provided herein are the current views of Nordea Markets as of the date of this document and are subject to change without notice. This notice is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient. The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results. Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction. This document may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Markets.