Flash Notes. Currency Outlook: A More Moderate Upward Trajectory In USD

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Frank Ward
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1 Global Economics & Markets Research Company Reg No Z Suan Teck Kin Quek Ser Leang Alvin Liew Lee Sue Ann Ho Woei Chen Francis Tan Tuesday, 07 April 2015 Currency Outlook: A More Moderate Upward Trajectory In USD Expectations for the Fed Reserve s first rate hike have been rolled back following a dovish March FOMC, a repeat of weak GDP in 1Q-2015 and a plunge in US March job creation. We have not changed our Fed rate normalization timetable and we still expect the Fed rate normalization to take place in June 2015 FOMC based on: 1. Expected growth rebound in 2Q & 3Q-2015 (similar to 2014), 2. Increasing US domestic wage pressure, and 3. The US Fed Reserve s desire to get away from the prolonged state of being stuck in zero-interest rate environment The Fed Reserve could well be the next (epi)center of central bank surprise in 2Q While we still see downside risks to the majors & Asian FX, we are making slight adjustments to our FX forecasts as we are now expecting a more moderate USD appreciation going forward. With reference to Monetary Authority of Singapore s (MAS) MPS on 14 April 2015, we have revised our view and now expect the MAS will stand pat with the current policy stance and not make any changes to the slope, bandwidth, or center of the SGD NEER. As such, our year-end target of the USD/SGD is lowered to 1.40 (from 1.44 previously). US Economy: 1Q Déjà Vu? This year s first quarter in the US is looking a lot like last year when extreme weather wreaked the quarter and sent 1Q 2014 GDP tumbling -2.1%q/q SAAR. The latest January/February data corroborated the weak 1Q outlook retail sales, housing data, PPI, various manufacturing & business surveys, personal income & spending, factory orders as most missed expectations or went into surprise decline. Initially, the exception was robust jobs growth but that also took a dive in the latest March jobs data. Indeed, the US jobs market finally converged with the recent spate of weak US data. After 12 straight months of 200,000- plus monthly gains (the best jobs gains rally since 1995), the US employers added just 126,000 jobs in March, way below expectations of 248,000 and the least since Dec 2013, while Feb & Jan data was also revised lower by a hefty 69,000. Manufacturing payrolls unexpectedly dropped by 1,000, the first monthly job loss since July 2013 as the sector could be showing signs of pressure under a strong US dollar while the restaurant industry recorded the weakest job gain since June Payrolls in mining and logging, which include oilfield services, declined by 11,000 in March, and employment in the sector declined by 29,000 so far in 1Q Despite the lacklustre hiring, March unemployment rate held steady at 5.5% the lowest since May 2008 helped by the slight decline in the labor force participation rate to 62.7% (from 62.8%) matching the lowest rate since Under-employment improved further to 10.9% (from 11% in February) the lowest since August 2008.

2 Tuesday, 07 April 2015 Page 2 That said, bad weather condition that hit many parts of US during 1Q was one key reason behind the hiring slowdown (the other being the port strikes). The US Labor Department s calculation of those unable to work due to inclement weather shot up to 182,000, way above the historical average of 141,000 for March. So we may yet see the jobs number return back above the 200,000 and higher clip in the subsequent months. And despite the temporary 1Q hiccup, we think that growth in the subsequent 2 quarters may rebound strongly (similar to 2014 when 2Q & 3Q together recorded strongest US growth in a decade). GDP may be boosted by higher personal consumption & domestic housing investment, even as the trade deficit may widened slightly with exports growing at a slower pace while imports rise faster on the back of stronger USD supporting consumption. We continue to monitor two factors that pose concern for US: 1) the weak external environment & 2) a stronger US dollar hurting US exports. That said, exports make up just 13% of US GDP, lowest among OECD countries while oil imports are also markedly reduced given the rich US domestic oil production. Indeed, we still see the oil price decline as a net positive for the US (despite it hurting the oil & gas sector) as it significantly lowers US business operating cost (especially for energy-intensive industries) and it puts more disposable income back to US consumers. For 2015, we still expect US GDP to contract -0.5%q/q SAAR but subsequently rebound and record a full year growth of 2.9% (from 2.4% in 2014) underpinned by the US consumer & the housing market while accounting for the downside risks of weaker external environment & much stronger USD. US FOMC Outlook: June 2015 Rates Lift-Off Still Likely In Our View Following the March FOMC, we are keeping to our Fed rate normalization timetable, expecting the Fed rate normalization to take place in June 2015 FOMC although the likelihood of a June rate hike has diminished noticeably after the March FOMC as well as the latest March payrolls data, according to market consensus. We based our June FOMC lift-off view due to 1) an expected growth rebound in 2Q & 3Q-2015 (similar to what we experienced in 2014), 2) increasing US domestic wage pressure (as many big US companies announced wage hikes recently), 3) the US Fed Reserve s desire to get away from the prolonged state of being stuck in zero-interest rate environment. As such we will not be surprised to see a Fed move in June FOMC although it may come as a surprise to the markets. Note that the theme so far in 2015 has been central bank surprises and the Fed Reserve could well be the next (Epi)center of market attention in the coming months. While we kept our June timeline for lift-off, we had earlier lowered our rate hike trajectory, bringing the FFTR to 1.00% by end-2015 (from 1.25%), and to 2.00% by end-2016 (from 3.25%) in lieu of the dot-plot chart downward revisions. That said, we fear that a strong US growth rebound in 2Q-3Q in addition to a return to robust job creation could re-steepen the rate trajectory. USD/SGD With the USD losing some steam from the dovish March FOMC meeting & weak March nonfarm payrolls data, both the DXY and USD/SGD pair had fallen 2.5% (as of 6 Apr). In tandem with the recent dollar strength reversal, the SGD NEER had picked up some strength and moved noticeably away from the -2.0% part of the policy band and is now just -0.7% currently. The Monetary Authority of Singapore will announce its semi-annual Monetary Policy Statement (MPS) on 14 April (8 am Singapore time). When we earlier published our MPS outlook (12 Mar 2015 Singapore: Monetary Policy Preview Looking For Midpoint Re-centering In April) and maintained our expectation of Singapore s core inflation in 2015, we did not expect the MAS to further lower the appreciation slope of the SGD NEER (our estimation is a 1.0% pa appreciation). Instead, we thought that the MAS may re-centre the midpoint lower (i.e. shifting the goal post ) to cater for the weakness in the SGD NEER with respect to the midpoint. Our SGD NEER sensitivity analysis showed that a shift in the goal post in April may see the USD/SGD ending 2015 at However, the SGD NEER is currently trading nowhere near the -2.0% band (Exhibit A) and it certainly had relieved some pressures off the back of the MAS. As such, we revised our view and now think that the MAS will stand pat with the current policy stance and not make any changes to the slope, bandwidth, or center of the SGD NEER. We see a possibility that the MAS may shift to a quarterly meeting schedule instead of the current semi-annual monetary policy statement calendar. Recent weakness in the USD does not change the fundamental economic recovery trend in the US or the rate-lift off timetable for the Federal Reserve. To us, it is just a short-term pull back. We believe that the interest rate normalization remains on track, but our year-end target of the USD/SGD is lowered to 1.40 (from 1.44 previously).

3 Tuesday, 07 April 2015 Page 3 EXHIBIT A: UOB SGD NEER Trading Away From -2.0% Band After Recent Weakness In The USD 127 SGD NEER Upper-end: 2% Lower-end: 2% Mid-Point of Estimated Policy Band Jan 07 Jul 07 Feb 08 Sep 08 Mar 09 Oct 09 May 10 Nov 10 May 11 Nov 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14 Sep 14 Mar 15 Source: Bloomberg EXHIBIT B: SGD NEER Trading Away From -2.0% Band After Recent Weakness In The USD (Spread Basis) Distance 1.00% 0.50% 0.00% Dist from Midpoint MAS Oct Decision (14 Oct) SGD NEER Distance From Midpoint NFP (3 Apr) -0.50% -1.00% -1.50% MAS Off-cycle Decision (28 Jan) -2.00% 'suspected' MAS Intervention -2.50% FOMC(18/19 Mar) Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Source: Bloomberg USD/RMB While we continue to hold to our view of the US Federal Reserve commencing its liftoff in its interest rate policy in June 2015, the US dollar was clearly overbought in the run-up to the FOMC meeting at end-march. This is reflected in the USD index, which surged 11% from beginning of 2015 to peak at on 13 March, and subsequently retreated sharply especially after the US FOMC meeting on 19 March. The RMB in recent weeks rode on the coattail of the USD selling wave. After weakening by 1.1% in the year to 3 March (to /USD), the currency recovered all its losses and some, to end at /USD on 3 April. All these moves show the two-way volatility will be a part of new normal for the RMB. While we believe that the long term prospects for the RMB are still favourable, near-term two way volatility will be significant as the currency will be increasingly driven by market forces as the Chinese government accelerates its pace of market reform. On the downside, slower broad-based growth remains in place, with data for the first three months of 2015 largely disappointed, which led us to downgrade our forecasts for China s 1Q15 GDP growth to 6.8%y/y, from our initial call of 7.1%

4 Tuesday, 07 April 2015 Page 4 (data to be released on 15 April), and 2015 growth projection to 6.8%, from our previous forecast of 7.2%.On a supportive note for the RMB, the internationalization efforts remain in motion and signs are that the pace is accelerating. This should mean that significant depreciation for the currency is fairly unlikely. For example, after the quick pace of setting up 5 offshore RMB centres in June-July in 2014, Canada was roped in late March This means that RMB settlement now covers all major trading time zones, from East Asia to North America, from just a single, Asian time zone as late as In addition, China is also aiming to have RMB included in IMF s Special Drawing Rights (SDR) basket of currencies, when the 5-year review is due later this year. An inclusion into SDR would usher in the RMB as a reserve currency and raise its profile as a settlement currency. Having said that, the US Fed s likely interest rate liftoff in June would still keep the USD well anchored in the next 3 to 6 months, which would in turn resume downward pressure on Asian currencies, including RMB. As such, we still see downside risks to the RMB especially in the middle part of 2015, before some recovery towards end-2015, though we are making slight adjustments to our RMB forecasts to take into account of the previously overbought USD. We now expect USD/RMB to rise slower to 6.22 at end-2q15 (vs. previous forecast of 6.33), and to end the year at (vs. previous forecast of 6.29), similar to the end-2014 value. However, we caution that the currency is likely to see significant volatility in the meantime, and we still maintain our view that a band widening could still take place this year. USD/MYR Despite the USD s reversal after the March non-farm payrolls, we continue to see upside risk to USD/MYR due to the weaker growth outlook in Malaysia, narrowing current account surplus and destabilizing factors arising from the 1MDB debt debacle. The weaker fundamentals has seen Fitch Ratings indicating that there is more than 50% likelihood that Malaysia s credit rating will be downgraded after being on negative outlook since July Malaysia s commodity exports were affected by flooding and weak prices. Exports contracted by 5.0% y/y in January- February period. We expect GDP growth to weaken to around 5.1% y/y in the first quarter after the better-than-expected 5.8% growth in 4Q14. Domestic interest rate is likely to stay on hold in the short-term as GST implementation this month will boost the headline inflation rate which has slipped to 0.1% y/y in February. Any surprise monetary easing could put the MYR at risk of further depreciation. Notwithstanding the lower USD/MYR after the US payrolls data, we are still maintaining our forecast for the pair at 3.76 by end-2q15 and trading to pegged level of 3.80 by end-4q15. In the event that the rate normalization in the US is being delayed, we would probably see our targets being pushed back slightly as well but the direction remains intact. USD/IDR Market s expectation of US rate lift-off timing has subjected USD/IDR to much volatility in view of the persistent current account deficits in the country. While we remain convicted to our call for the beginning of Fed rate normalization in June, we believe that unwinding in overbought USD/IDR positions in the short-term could push back our targets. We have trimmed our end-2q15 USD/IDR forecast to 13,400 from earlier 13,600. Our year-end target for the pair is at 13,700. Indonesia s headline inflation edged slightly higher to 6.38% y/y in March from 6.29% in February. We maintain our forecast that the inflation will remain relatively steady in the coming months before dipping sharply in November and December due to high base effect. Core inflation was 5.04% y/y in March compared to 4.96% in February. With steady inflation and US Fed preparing to normalize interest rates, we would expect Bank Indonesia to be inclined to maintain interest rates in the next couple of months. We saw the 25 bps interest rate cut in February as a reversal of the November rate hike given the backing down in domestic petroleum prices which now follows global prices. Earlier-than-expected monetary policy easing could expose the USD/IDR to more upside risk. EUR/USD Some of the recovery in EUR/USD of late relates to the post-march FOMC surge, after the Fed removed its forward guidance that depends on the date and replaced it with guidance that depends on the data, yet at the same time, lowering their economic forecasts significantly. In fact, the Euro has been steady since the start of April, posting gains against five of its seven major counterparts. That said, we continue to find it difficult to see any sustainable recovery in the EUR/USD. With respect to Greece, there is a EUR458mn payment due to the IMF on 9 April, as well as a EUR80mn interest payment due to the ECB on 20 April. Although there have been reports circulating that the national government will be able to raise the cash by borrowing from local governments, we would not overemphasize the positive effects that the ongoing Greek drama and debt negotiations will hold for the EUR. Greece may be able to dodge yet another bullet, but focus would quickly swing

5 Tuesday, 07 April 2015 Page 5 back to the fact that the US dollar maintains a fundamental advantage over most of its counterparts. Whether the eventual rate hike by the Fed occurs in June, September or December; the US central bank remains on course to tighten where the ECB has only begun its QE programme. We thus continue to look EUR/USD to trade towards the level by the middle of the year, before moving below parity by the end of the year. GBP/USD We are now just a month away from the UK General Election, and current polling shows no single party is likely to take an overall majority following the 7 May vote. Essentially, a messy coalition could take weeks to put together, and GBP is likely to suffer amidst such uncertainty. Furthermore, low inflation will allow the BoE to adopt a longer wait-and-see approach, coupled with continued jawboning against the strength of its currency. This means that the pound s weakness is here to stay. AUD/USD The RBA chose to put off a cut in interest rates by another month, keeping borrowing costs steady at a record low of 2.25% for its April meeting. Waiting on for more information around Sydney s housing market, as well as the latest employment and inflation data later in April may have been the key reasons behind the latest decision. Yet, the accompanying statement read dovishly with an easing bias clearly evident. Penciling in another 25bps cut, we continue to believe that weakness in the Aussie will prevail, especially amid a backdrop of falling iron ore prices, below-average growth, rising unemployment, as well as weak business and consumer confidence. We look for AUD/USD to move lower towards the region by mid NZD/USD The NZD held up relatively well in March. There was much anticipation for the RBNZ announcement on 12 March which saw them remain on hold at 3.50%. The central bank maintained their neutral stance for the path of rates; and their central view is for rates to remain on hold for the next two years. NZD/USD reacted positively as a result, now currently hovering around the region. We still believe that the Kiwi remains vulnerable in a backdrop of a comparatively dovish RBNZ against a Fed which will eventually begin policy normalization. However, we are making slight adjustments to our NZD/USD forecasts to take into account the recent broad dollar weakness, now looking for the pair to trade towards the 0.73-region by end-2q. FX OUTLOOK As of 07 Apr 2015 End 2Q15F End 3Q15F End 4Q15F End 1Q16F USD/JPY EUR/USD GBP/USD AUD/USD NZD/USD USD/SGD USD/MYR USD/IDR 12,985 13,400 13,600 13,700 13,700 USD/THB USD/PHP USD/INR USD/TWD USD/KRW 1,089 1,140 1,150 1,160 1,150 USD/HKD USD/CNY Source: Reuters, UOB Global Economics & Markets Research

6 Tuesday, 07 April 2015 Page 6 FX Technicals EUR/USD: The EUR down-trend that started from the peak in the middle of 2014 is extremely oversold. Based on the monthly Cutler s RSI, the current reading is at record low. The latest CFTC data also shows record EUR short position in the futures market. The risk of a break below the low appears to be rather slim in the next 1 to 2 months. However, any EUR strength is not viewed as a bullish reversal but as part of a broad consolidation range which should eventually lead to an attempt to take out the low. For the next 1-2 months, we expect this pair to trade choppily within a very broad range of / GBP/USD: While the current GBP weakness still appears incomplete, the target at the 2010 low of may not be seen so soon. There are warning signs that a recovery phase is imminent and GBP may rebound towards / first before resuming its long-term down-trend. Our base view is that will hold for the next couple of months but the target will likely be seen only in late 3Q15. AUD/USD: Both fundamental and technical factors continue to weigh on AUD and this pair is expected to remain on the defensive in the next few months. At current juncture, there is no significant long-term support until the major rising trend-line which is currently sitting at However, oversold conditions could lead to a consolidation phase first but as long as the / resistance zone is intact, we expect to see by end of 2Q15 if not early 3Q15.

7 Tuesday, 07 April 2015 Page 7 USD/JPY: Despite overall positive undertone, USD has failed to make much headway against the JPY. The upward momentum is faltering as evidenced by the failure to extend its recent gains above /05. That said, the current movement appears to be part of a consolidation phase and as long as is intact, this pair is expected to eventually move above /05 towards the 2007 peak of USD/SGD: After registering 9 consecutive months of higher high and higher lows, USD finally broke below the March low of While this suggests that the long-term USD up-trend that started in July 2013 has ended, the down-move from the peak is viewed as a corrective pull-back and not the start of a bearish reversal. That said, the current USD weakness appears incomplete and further down-move towards the major support at will not be surprising. However, our base view is that will hold and this pair is expected to at least retest the high within the next 2 to 3 months. An unlikely break below would indicate a deeper pull-back to the 1.31/1.32 region. USD/MYR: USD registered a high of in late March before pulling back sharply is less than 100 pips away from the 2009 peak of In view of the extremely strong trending up-move that started from August 2014, we consider the current drop from the high as part of a corrective pullback and not a bearish reversal. That said, the pull-back appears incomplete and could extend lower to but a move below the next support at is not expected. However, / is clearly a major resistance zone now and this pair may trade in a choppy manner below this zone until the end of 2Q15 before moving higher. Disclaimer: This analysis is based on information available to the public. Although the information contained herein is believed to be reliable, UOB Group makes no representation as to the accuracy or completeness. Also, opinions and predictions contained herein reflect our opinion as of date of the analysis and are subject to change without notice. UOB Group may have positions in, and may effect transactions in, currencies and financial products mentioned herein. Prior to entering into any proposed transaction, without reliance upon UOB Group or its affiliates, the reader should determine, the economic risks and merits, as well as the legal, tax and accounting characterizations and consequences, of the transaction and that the reader is able to assume these risks. This document and its contents are proprietary information and products of UOB Group and may not be reproduced or otherwise.

FX Insights. Chart Of The Day USD/JPY: Next significant support at Friday, 29 April 2016

FX Insights. Chart Of The Day USD/JPY: Next significant support at Friday, 29 April 2016 Quek Ser Leang Quek.SerLeang@uobgroup.com Lee Sue Ann Lee.SueAnn@uobgroup.com Global Economics & Markets Research Email: GlobalEcoMktResearch@uobgroup.com URL: www.uob.com.sg/research Chart Of The Day