Asia Monthly Update July

Transcription

1 Asia Monthly Update July Flow driven FX rally Amy Y. Zhuang, 25 June 2016

2 Update on Asia and selected Asian countries 3 Financial forecasts 20 Contacts & Disclaimer 23 Nordea Markets Singapore Branch Magnus J. Karlsson Jussi Pekka Lyytinen Nikolaj Lynge Daniel Aagaard Pedersen Fredrik Fremberg Nordea in Asia Corrado Lillelund Forcellati Antti Oksala Economic Research Amy Yuan Zhuang, CFA

3 Asia Executive summary It did not take many weeks before risk sentiment returned to Asia. The anticipation of massive policy easing the major as well as smaller economies have pushed bond yields lower and equity prices higher. Foreign capital entering Asia (five countries that we have data for) reached USD 10bn in three weeks. This has pushed some of the Asia FX to levels stronger than before the Brexit. We do not expect the flow driven strength to be sustainable. Net inflows will likely start to decelerate and eventually outflows could occur on investors cashing in profits. This could push the Asia FX lower. In addition, we expect a weaker CNY and a stronger USD to weaken the Asia FX. The economic outlook in Asia remains clouded by the weak global economy and export demand. Domestic investment is considered as key to growth in the coming years. Governments in Asia will continue easing monetary policy to help funding. Market reforms may be speeded up to attract FDI. Our pick for the relative outperformers in H2 2016: INR and THB Our pick for the relative underperformers in H : CNY, KRW and TWD 3

4 Asia Asia: policy easing mode We have highlighted it for some time, the growth outlook in Asia is not what it used to be. Most Asian countries have seen their GDP growth falling over the past few years along with the output gap narrowing. Lack of external demand, reflected by contracting exports in Asia, remains a negative factor for growth. Therefore, most Asian governments have turned their eyes at domestic investments. Several obstacles need to be removed before an investment boom can take place. One is to loosen financial conditions, which remained broadly negative since During the past two years, most central banks in Asia have lowered rates to ease funding conditions. Market expect more rate cuts for five out of 11 countries. Fiscal stimulus is also expected, particularly for countries with already record low rates. Another is to improve business conditions and attract foreign direct investment. This is also a focus on the governments plans. 4

5 Asia Asia FX: flow driven The market forgets easily nowadays. Just a few weeks after the Brexit vote, sentiment returned to risk on mode on anticipation that major central banks and governments will launch massive policy easing to avert a deep shock. A majority of the EM Asia currencies have gained vs the USD since the beginning of the month and half of them are stronger than pre Brexit levels. The strength was highly driven by foreign capital inflows. Alone inflows into the local equity markets in India, Indonesia, South Korea, Taiwan and Thailand reached USD 10bn in three weeks. We do not expect the flow driven rally to be long lasting. Investors will likely start to cash in gains so inflows will either decelerate or we will see outflows. Either way, the Asia FX will find less support in the coming weeks. In addition to less support from the flows, we expect a weaker CNY and a stronger USD to push the general Asian FX lower in H2 this year. 5

6 China China: growth momentum turning sour The recently published Q2 GDP growth of 6.7% confirmed that the economy stabilised. But the market questioned the official data that showed consumption as the main driver. The wide perception was frontloaded investments that lifted momentum. Net exports once again dragged down growth. We maintain the view that the stabilisation will be short lived as stimulus is becoming less effective in boosting growth. The Citi Economic Surprise Index has dropped sharply, indicating that key data from China start to disappoint again. Given the Brexit expected to cloud global business and consumer confidence, outlook is not bright. We expect the GDP growth to be 6.5% for this year, with H2 underperforming H1. Under such circumstances, the easy policy will continue. Particularly, we expect two RRR cuts in H2 and maintain our view of one rate cut at the year end. Moreover, trillions of yuan s public investments will be launched. 6

7 China CNY: following the market Over the past two months, the CNY has weakened against both the USD and the currency basket. This has raised questions whether Beijing was engaged in a concealed devaluation. In fact, it just followed the market. For the CNY against the USD, the weakening was mostly initiated by a stronger dollar. The CNY has a historically high correlation to the USD index now and the daily fixing has become more market based, by being determined by the previous day s close spot rate. This mechanism creates a cycle, starting with the stronger dollar initially pushes the yuan weaker and lowers the fixing rate on the next day. Then, the spot rate would be against the backdrop of weaker fixing. Unless the USD strength ends or the PBoC intervenes, the CNY will unlikely break out of this self reinforcing cycle. The weaker trade weighted CNY was due to a much weaker CNY against the JPY, which has a weight of 14.7% in the CFETS index. 7

8 Hong Kong HKD: holding the ground Looking at the HKD against the USD movements over the past one and an half year, it appears that very few things, such as intense devaluation pressure against the CNY/CNH and changing expectations on the Fed, can deviate it from the lower band of the fixed exchange rate regime. One of the key reason why the HKD could hold its ground is capital inflows from mainland China. During the past year, deteriorating outlook for the Chinese economy and rising depreciation expectation on the CNY have caused more mainland Chinese to invest in Hong Kong, either property, stocks or insurance. The latter was so popular that Chinese authorities had to introduce restrictions to limit outflows. The relative strength of the HKD is unrelated to the growth outlook, which is clouded by the slowdown in China. The expected delay of Fed rate hikes, triggered by the Brexit, will likely help momentum in Hong Kong, as the island economy would be forced to hike rates as well. 8

9 India India: delivering reform promises One of RBI governor Rajan s desired legacies is to reform Indian banks. Despite his announced departure from the RBI last month, which was feared by some to be a sign of deferred reforms, bank reform plans carry on. In mid July, the government has announced to inject INR 229bn (USD 3.4bn) in capital into 13 state owned banks to clean up bad loans. The high non performing loan ratio (more than 12%) is an obstacle for a domestic investment boom because of funding difficulty. This follows a new bankruptcy code to help banks recovering defaulted loans. Another good news is that the long waited goods & services tax (GST) bills is expected to be presented in parliament in the last week in July. It has a fairly good chance of being passed. A risk is that these reforms may face a few setbacks before fully implemented. It is crucial for India improve its business environment, which is ranked lowest by the World Bank. 9

10 India INR: waiting for Rajan s successor In addition to the external drivers such as risk sentiment and the USD movements, the INR has been affected by one unanswered question: who will succeed the well respected Rajan as the new central bank governor from September? The market widely expects a more dovish head of the RBI. Indian government bond yields have fallen to their multi year lows on the anticipation of an easier monetary policy. Foreign investors have net bought Indian bonds for USD 1bn since 11 July. Foreign net holding of Indian stocks rose by nearly USD 900m. The inflows have supported the INR on the strong side. In the coming weeks, investors will start cashing in their profits so a modest sell off can be expected, which will weigh on the INR. However, the INR does not appear overbought for the timing being and it is undervalued compared to the fundamentals. Thus, the INR is most likely to range bounce unless the Fed unexpectedly change their stance. 10

11 Indonesia IDR: a surprise no action On 21 July Bank Indonesia surprisingly kept rates unchanged at 6.5%. This came after the BI made a surprise cut in June. It seems that the BI likes the surprise element. The market has expected a rate cut against the backdrop of sustained strength of the IDR after the Brexit. A strong IDR seems to concern the authorities, which explains the BI s dovish stance. The central bank said there is still room to ease monetary policy. The IDR is one of the Asia FX that has not erased its post Brexit gain, even though the USD index has climbed higher. This was because of strong inflows into domestic bond and equity markets. The IDR offers the highest carry return in Asia ex. Japan. Moreover, the recently approved tax amnesty to fund the government budget gap also pushed the IDR higher. However, the IDR seems overbought for the time being. More fundamentally, it also look slightly overvalued. 11

12 South Korea KRW: current strength unsustainable Unlike some of its Asian peers, the KRW has sustained its post Brexit gain vs the USD. The renewed risk on sentiment and accompanied inflows have pushed almost 5% higher and the KRW 4% since 27 June, by which time the KRW started to decouple from the USD index. USD 6bn of net foreign capital have entered Korean equities year to date. A third of that amount came after the Brexit news. Based on our incomplete data (we do not have flows data on all countries), South Korean stock market received second most post Brexit inflows. Given that the KRW appreciation is a result of speculative flows, we do not expect it to last long, especially not given the rising growth risks. The KRW appears overbought, which also argues for a correction in the near term. As we expected, the BoK refrained from cutting rate on 14 July due to concerns about a further rise in household debt. So the economy will rely on fiscal stimulus. 12

13 Malaysia MYR: haunted by old ghosts Year to date the MYR is still the best performing FX in Asia but it was not the case in the past week, when the MYR lost 2.5% since 15 July. A major explanation was the BNM s unexpected rate cut on 13 July to 3%. It was the first rate cut since February The economy needed it. In Q1 GDP grew by 4.2%, the weakest since Both business and consumer confidence are close to historical low levels. In addition to the rate cut, other factors, the same as before, were attributable to the MYR weakness. First of all, oil prices started falling again after Brexit news. Secondly, expectation on a Fed rate hike in September has risen in the past week. Currently, the market is pricing in 24.6% probability of a hike from 19.2%. Finally, the 1MDB scandal has resurfaced, reminding the market about the political risks. Despite the unfavourable factors, the MYR downside may be limited as it is still undervalued after the sharp loss since

14 Philippines PHP: no rate cuts on the cards The Philippines is one of the few countries in Asia, where the market is not expecting monetary policy easing in the near term. Economic outlook remains upbeat with high growth and rising confidence from both consumers and businesses. In the Q2 inflation report, released on 22 July, the central bank expects rising inflation in H2 back to the targeted range of 2 4%. The PHP has been tracking the USD index in the first part of July. In mid July, it was strengthened on renewed risk on sentiment and strong inflows. During the last week, rising expectation of a Fed hike this year has pushed it weaker against the USD. For the coming few months, the PHP still faces some downside risks due to the general USD strength and the PHP seems slightly overvalued. However, the depreciation pressure should be smaller than other Asian FX due to solid fundamentals. 14

15 Singapore SGD: catching up Singapore s economy expanded by 2.4% y/y in Q2, the most since Q The growth was supported by production in biomedical equipment and electronics. Thanks to disappearing base effect from the lower oil prices a year earlier, CPI inflation has rebounded to 1% in May, well within the MAS inflation target of %. The improvement should relieve the pressure on the MAS to ease monetary policy. But more actions from MAS in October are not off the table because growth outlook remains dire. If global trade remains weak, Singapore will be hit through its exporting manufacturing sector and shipping activities, which will likely have a chain effect on the island s service sector. The post Brexit USD strength failed to weaken the SGD, likely due to renewed risk on sentiment and inflows into Emerging Markets. This divergence is not likely sustainable, so the USD/SGD could see catch up increase. 15

16 Thailand THB: on the up and up Thailand s economy is performing its best in years. Although consumer confidence continue to decline due to political uncertainty and high household debt, appetite in business investment and production is on the rise. Exports have held up strongly, primarily of fishery products. Thus, we expect Q2 GDP to remain solid, close to the level of Q1 (3.2%). The record high current account surplus of 13% of GDP, a result of strong exports, puts pressure on the THB to strengthen versus the USD. There have been signs that Bank of Thailand has intervened to curb excess gain in the THB. Several factors support upside potentials for the THB vs the USD in the coming months. First, the Thai US yield spread is widening instead of narrowing given less need for a rate cut in Thailand. Secondly, equity inflows are strong. Finally, the more than 20% weakening of the THB since 2013 makes the THB slightly undervalued. 16

17 Taiwan TWD: downward correction in sight As expected by our previous Asia newsletter, Taiwan cut interest rates by 12.5bp To 1.375% in late June as a response to an economy in recession and more external risks followed by the Brexit. This was the fourth rate cut during the past year. The record low interest rate was 1.25% and took place during Exports grew strongly in June by 3.4% y/y mostly to the EU, the US and Japan. However, this will likely prove short lived as the Brexit could hurt demand from Europe in the months ahead. So there is little probability of a remarkable rebound of industrial production. During the past month, post Brexit correction gain caused the TWD to perform well against the USD, along with Taiwanese equities. Since 1 July, a net amount of USD 4bn of foreign capital has flown into Taiwanese equity market, pushing the equity index to the highest level since last summer. The TWD has benefited from the booming demand. 17

18 Vietnam VND: export oriented growth under pressure This week, the prime minister admitted that Vietnam may struggle with achieving the annual growth target of 6.7% for this year, as the average growth for H1 was only 5.5%. The underperformance was partly due to the worst drought in 30 years. 16% of Vietnam s economy comes from the agriculture sector. The PM s warning about the possibility of missing the target is a sign that Vietnam will not pursue a growth at all cost strategy. We will unlikely see a significant pick up in H2 as the Brexit has likely a negative impact on global trade. This would hurt Vietnam s booming export industry. The dire growth outlook has had little impact on the VND, which is managed in a crawling peg system against the USD. The authorities have kept the daily fixing rate relatively stable. Thus, the spot rate has moved little and stay around the level of against the USD. 18

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

20 Forecast Nordea FX forecasts Exchange rates vs. EUR Exchange rates vs. USD 25/07/2016 3M 31/12/ /06/ /12/ /07/2016 3M 31/12/ /06/ /12/2017 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/CZK USD/CZK EUR/HUF USD/HUF EUR/TRY USD/TRY EUR/RUB USD/RUB EUR/ZAR USD/ZAR EUR/CNY USD/CNY EUR/INR USD/INR EUR/BRL USD/BRL EUR/MXN USD/MXN

21 Forecast Nordea rates forecasts Monetary policy rates Country Spot 3M United States Japan Euroland Denmark Sweden Norway United Kingdom Switzerland Poland Russia China India Brazil Czech Republic Hungary Turkey month rates Spot 3M United States Euroland Denmark Sweden Norway United Kingdom Poland Russia Latvia year government Country Spot 3M United States Euroland Denmark Sweden Norway United Kingdom Poland

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

23 Contacts & Disclaimer Nordea in Asia Corrado Lillelund Forcellati Antti Oksala Nordea Markets Singapore Branch Magnus J. Karlsson Jussi Pekka Lyytinen jussi Nikolaj Lynge Daniel Aagaard Pedersen Fredrik Fremberg Economic Research Amy Yuan Zhuang, CFA Any information provided herein by the Nordea Group is intended for background information only, and is subject to change without notice. This information is not directed to, or intended for distribution to or use by, any non accredited investor, non professional counterparty, or any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. This information does not constitute investment advice nor is the information intended as any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction. Please seek professional advice before making any investment decision. Nordea Group and/or its other associated and affiliated companies cannot guarantee, and do not make any representation or warranty, as to the adequacy, completeness, accuracy or timeliness for any particular purpose of the information provided herein. Nordea Group and/or its other associated and affiliated companies will not be liable for any direct, indirect or incidental, special and/or consequential damages (including any claims for loss of profits) arising from any use of and/or reliance upon such information provided. The text of the full disclaimer is available at