USD is becoming oversold

Transcription

1 Asian currencies mid-quarter update USD is becoming oversold DBS Group Research 1 August 217 Asia CNY HKD TWD KRW SGD MYR THB IDR PHP VND INR USD JPY EUR GBP AUD US news is unlikey to get worse EU news is unlikely to get better Asia s currencies will perform differently Two-way street In the middle No rush to rise Stable Too strong To strengthen Too strong Neutral Weak again Flat Stable Oversold Moving with US yields Overbought Post-Brexit referendum range Higher USD has been struggling since the start of 217 % YTD vs USD as of 31 Jul MAJOR CURRENCIES B R I C S EMERGING ASIAN CURRENCIES DXY is the benchmark USD Index -6 EUR AUD NZD CAD GBP JPY DXY INR ZAR BRL CNY RUB KRW THB TWD SGD MYR IDR VND HKD PHP Philip Wee (65) philipwee@dbs.com Refer to important disclosures at the end of this report 1

2 Currency forecasts DXY index usd/ JPY EUR /usd GBP /usd usd/ CNY usd/ HKD usd/ TWD usd/ KRW usd/ SGD usd/ MYR usd/ THB usd/ IDR usd/ PHP usd/ VND usd/ INR AUD /usd DBS forecasts in red. from Bloomberg as of 31 Jul 217 2

3 USD depreciated despite 3 Fed hikes The USD has not been able to appreciate in spite of three Fed hikes since Dec 216. This owes to the growing insensivity of US bond yields and short-term interest rates to the subsequent hikes in March and June. After the election on 8 Nov 216, there was an aggressive repricing in US bond yields on optimism that Trump s stimulus plans would lift inflation. Between 8 Nov and 28 Dec, the DXY Index rallied 5.5% on a surge in US 1Y bond yield that was thrice the 25bps hike. Bond yields in other countries were subdued due to domestic worries, e.g., EU break up fears from the rise of far right populist parties ahead of important EU elections, Brexit uncertainties in the UK and fears of US protectionism aimed at emerging markets. Not long after the subsequent hike in March, 1Y bond yields retreated lower by about 25-5bps. By mid-may, the DXY had returned all of its post-crisis gains. This was the same month when US CPI inflation fell below the Fed s 2-2.5% inflation target. US real GDP growth also slipped below its post-crisis average to 1.2% (QoQ, saar) in 1Q17. Neither did it help that Trump s healthcare and tax reforms started to go off track. By end-july, the DXY was 4.7% below its November election level. The deep USD losses were not solely attributed to disappointing US developments. They were also attributed to the emergence of the EUR which holds the largest weight (57.6%) in the DXY. This started initially as a relief rally from positive French election outcomes in Apr-May easing EU break-up fears. The next bout of EUR strength in Jun-Jul was attributed to a markedly more upbeat EU growth/inflation outlook by the European Central Bank (ECB). Markets proceeded to take EUR/USD above its post-qe range of in July after the ECB assessed in late June that deflationary pressures were now replaced by reflationary ones. Looking ahead, we suspect US news is unlikely to worsen further. And that EU news is unlikely to improve. US equities have reclaimed their post- US election lead, in line with the rebound in US GDP growth to 2.6% (QoQ,saar) in 2Q17 from 1.2% in 1Q17. According to consensus, growth in 218 is likely to remain above 2% in the US, and below 2% in the EU. G4 exchange rates % change since US presidential election Nov-16 Jan-17 Mar-17 May-17 Jul-17 EUR GBP USD JPY Why USD did not rise with Fed hikes bps ch since US presidential election 8 Fed Funds rate 7 6 US 2Y bond US 1Y bond 1 3M USD Libor -1 Nov-16 Jan-17 Mar-17 May-17 Jul-17 3

4 Only US will grow above 2% growth in 218 Real GDP, % YoY forecast % inflation 3. target 2.5 US EU 1. UK.5 JP. -.5 Jan-15 Jan-16 Jan-17 Jan-18 US to move back above 2% inflation target % YoY forecast 3. UK 2.5 2% inflation target US EU 1..5 JP Jan-15 Jan-16 Jan-17 Jan-18 While efforts to reform the US healthcare bill have failed, Republican lawmakers are working behind the scenes to come up with a tax reform plan in the coming months. Meanwhile, in Europe, French President Macron s approval ratings have plunged. EUR bulls will find it hard to ignore the slide in EU stocks after the French presidential elections. The German DAX also fell to a 3-month low on a sell-off in German automakers on two fronts a diesel emissions scandal and a strong EUR hurting profits in their export-reliant businesses. With the DXY near the floor of its two-year range, some central banks, like Australia and New Zealand, have become more vocal about wanting their currencies weaker. The ECB has also warned markets that the recovery may be hurt by an unwanted tightening in financing conditions, i.e., an aggressive upward repricing in EU bond yields that boosts EUR strength. All things considered, the prospect for the USD to find support cannot be discounted. G4 benchmark stock indices G4 1Y government bond yields % change since US presidential election bps ch since US presidential election US JP EU 6 4 US EU 1 UK 2 JP 5 UK -2-5 Nov-16 Jan-17 Mar-17 May-17 Jul-17-4 Nov-16 Jan-17 Mar-17 May-17 Jul-17 4

5 Northeast Asian currencies in 217 Indexed: 31 Dec 216= JPY TWD KRW 1 99 Jan-17 Mar-17 May-17 Jul-17 Southeast Asian currencies in 217 Indexed: 31 Dec 216= MYR SGD THB Jan-17 Mar-17 May-17 Jul-17 Asian currencies no broadbased appreciation With the exception of the HKD and the PHP, 217 has been a favourable or at least stable year for Asian currencies so far. The KRW and the TWD led the appreciation in Northeast Asia while the THB and the SGD led in Southeast Asia. These currencies share a common trait healthy current account surpluses. One should note, however, that whenever these currencies have appreciated by 6% YTD, they typically run out of steam. In the case of Taiwan and Korea, this has owed to export competitiveness. In Thailand and Singapore, currency strength was unwelcome because of low inflation. The VND and the IDR have been the year s least volatile exchange rates. The stability of the VND was more interesting because of the 1.2% depreciation in its official mid-rate. Investor confidence in Vietnam s high growth story remains intact. In Indonesia, policymakers have been focused on maintaining stability, a stable exchange rate and a neutral monetary policy. Trade data will need to be monitored closely to ensure that the double-digit contraction in June was seasonal / temporary. Flattish Asia ex Japan currencies in 217 Indexed: 31 Dec 216=1 17 INR 16 CNY 15 IDR 14 VND 13 Weakest Asian currencies in 217 Indexed: 31 Dec 216= HKD PHP 99 Jan-17 Mar-17 May-17 Jul Jan-17 Mar-17 May-17 Jul-17 5

6 Surprise contraction in Indonesia's trade % YoY 3 Exports Imports 2 Another rate cut coming in India % YoY, % pa 12 1 Real GDP Refi rate Jan-13 Jan-14 Jan-15 Jan-16 Jan RBI's 4±2% inflation target range CPI inflation The CNY was stable in the first 4-5 months owing to measures (capital controls and tweaks to the exchange rate formation mechanism) to discourage one-way depreciation bets. Since May, the CNY has been allowed to track its formal currency basket to encourage two-way volatility. In contrast to the CNY, the INR started the year on a strong note only to consolidate in a tight range from April. India s GDP growth slowed to below the policy rate while CPI inflation fell below target, which in turn, opened the door a rate cut at the next policy review on 2 Aug. The PHP has been Asia s weak link this year. With record trade deficits cancelling out foreign worker remittances, the current account surplus is set to fall into deficit. 217 will be the first year since 22 that the Philippines returned to being a twin deficit country. Moody s is, meanwhile, monitoring for overheating signs. Last but not least, Asia s export recovery is no longer as robust as at the start of the year. Many countries have seen growth rates fall below 2% YoY recently, with some back in single-digits. One has fallen back into negative territory again. Philippine surge in trade deficit USD billion, 12mth rolling sum 3 Export performance in the last 12 months % YoY 4 All data Jun17 except for MY, TH & PH (May17) 25 2 Overseas foreign worker (OFW) remittances Trade deficit MY VN CN KR PH TW HK TH SG IN ID 6

7 US dollar DXY index is near the floor of its two-year range seen before the US presidential election By end-july, the DXY (USD) Index had depreciated 9.1% YTD to This was in spite of three Fed hikes in Dec, Mar and Jun. The initial USD appreciation in Nov-Dec last year was attributed to the repricing of the US 1Y bond yield from 1.85% to 2.6% between 8 Nov and the Fed hike in mid-dec. The USD s depreciation this year was blamed on US growth falling below trend in 1Q17, and inflation easing below the Fed s 2-2.5% target. The US 1Y bond yield retreated into a lower % range after the March hike, where it stayed into the June hike. During this period, Trump s credibility eroded quickly after he failed to deliver on his promise to reform healthcare. Meanwhile, in Europe, the ECB s growth optimism was misinterpreted as a hawkish move towards exiting its loose monetary policy. Looking ahead, the DXY may find support as it nears the floor of its two-year seen before the US presidential elections. US growth has returned above-trend in 2Q17. Republicans are also working behind the scenes on a tax reform plan. In Europe, both inflation and EU stocks have fallen, with the strong EUR becoming a concern to German exports. DXY index outlook Shaded area: Pre-US election range Ceiling Floor % appreciation a year in DXY vs USD Width ±4.% around mid Japanese yen USD/JPY has been keeping close to the centre of our projected USD/JPY has been highly correlated with the 1Y US-JP government bond yield differential this year. In reality, USD/JPY fluctuated mostly with the US 1Y treasury yield. This was attributed to the Bank of Japan s (BOJ) yield curve control policy which keeps the 1Y JGB yield anchored near %. Until this relationship breaks, USD/JPY is estimated to remain in a range as long as the US 1Y bond yield is confined within the Fed s 2-2.5% inflation target range. Unlike its US/EU peers, the BOJ is not debating its exit strategy. With inflation still far from achieving its 2% target, the BOJ is keeping this to internal analysis to avoid unnecessary market volatility. On the political front, PM Shinzo Abe is facing a crisis. His ruling Liberal Democratic Party (LDP) suffered a historic loss at the Tokyo elections on 2 Jul. Approval ratings for Abe have suffered due to scandals involving cronyism and favoritism. It is no longer a certainty that Abe will secure a third term at the LDP party leadership election in September. At this juncture, the market believes that Abenomics and BOJ s policies can carry on without Abe. USD/JPY outlook Ceiling Floor % depreciation a year in JPY vs USD Width ±15.% around mid

8 Euro EUR/USD in a higher July was a watershed month for the single currency. EUR/USD broke above its established after the European Central Bank (ECB) launched its quantitative easing (QE) programme in Mar 215. EUR/USD appreciated to a high of on 31 Jul, a level not seen since Jan 215. The above breakout was consistent with the ECB s views on 26 Jun that deflationary forces have been replaced by reflationary ones. The ECB was also encouraged by above-trend growth that it considered geographically well-distributed. Unfortunately, markets may have gotten ahead of themselves regarding the ECB s plan to withdraw stimulus. According to ECB staff projections, rate hikes will only come in 219 when inflation is expected to be durable in meeting its 2% target. This was also consistent with the ECB s view that rate hikes will only come well after asset purchases end. At its next meeting on 7 Sep, the ECB is expected to extend asset purchases into 218 at tapered pace. According to the relative performances of EU-US bonds/equities, EUR/USD may have appreciated too much too quickly. On balance, it is not unreasonable to expect EUR/USD to move into a higher range. EUR/USD outlook Shaded area: stepped up ranges Ceiling Floor % appreciation a year in EUR vs USD Width ±7.1% around mid British pound GBP/USD to keep to the wide seen after the Brexit referendum We remain cautious over the lastest bout of GBP strength. Between 21 Jun and 31 Jul, GBP/USD rose 5.1% from a low of to a high of This was triggered by 3 monetary policy committe members who voted for a rate hike at the Bank of England (BOE) meeting on 15 Jun. At the next BOE meeting on 3 Aug, there will be fewer (if any) member calling for a hike. One of the three hawks, Kristin Forbes, has been replaced by Silvana Tenreyro, who shares BOE Governor Mark Carney s view that Brexit will hurt the UK economy. BOE chief economist Andy Haldane is likely to reconsider his position to join the hawks. CPI inflation retreated to 2.6% YoY in Jun17 from 2.9% in May17, and is unlikely to push above 3% anytime soon. Real GDP growth slipped to 1.7% YoY in 2Q17 from 2.% in the previous quarter, still entrenched within its % range established since 3Q15. Looking ahead, Brexit uncertainties will weigh on business investment and consumer spending. now sees UK growth decelerating into a lower % range into 218. GBP/USD outlook Shaded area: Descending price channel Ceiling Floor % appreciation a year in GBP vs USD Width ±11.6% around mid 8

9 Chinese yuan USD/CNY to flatten into a range USD/CNY was mostly stable in a range in the first 4-5 months of the year. During this period, China discouraged one-way CNY depreciation bets on capital outflows, first with capital controls, and later by refining its exchange rate formation mechanism. It also helped that real GDP growth surprised on the upside at 6.9% in 1Q17 and 2Q17, compared to 6.7% in 216. Foreign reserves also increased to $357bn in Jun17, its highest level since Oct16, after a brief dip below $3 trn in Jan17. From late May to early June, the CNY was allowed to appreciate past 6.8 against the USD. The goal was to realign the CNY to its newly expanded basket of currencies. Thereafter, USD/CNY has been fluctuating with the USD s trend against the currencies of its major trading partners. In this regard, we need to move away from projecting an ascending price channel for USD/CNY. Looking ahead, we expect the DXY (USD) index to find support near the floor its two-year range before the US presidential elections. Hence, our projecting for USD/CNY is now a flat range between 6.67 and USD/CNY outlook Ceiling Floor % appreciation a year in CNY vs USD Width ±2.7% around mid Hong Kong dollar USD/HKD to keep near 7.8, the mid-point of its convertibility band Since mid-june, USD/HKD rose above 7.8, into the upper half of its convertibility band. This was in spite of the USD s weakness in the region. The HKD and the PHP were the only two Asian currencies that depreciated this year. This, however, did not imply weaknesses in HK. On the contrary, real GDP growth accelerated to 4.3% YoY in 1Q17 from its low of 1.% in 1Q16. The unemployment rate fell to 3.1% in Jun17 from 3.4% in Nov16. Hong Kong has the best performing stock market in Asia in the first seven months of this year. In June, Hong Kong Monetary Authority (HKMA) Chief Executive Officer Norman Chan reaffirmed the commitment of the HKD peg to the CNY. Four criteria must be fulfilled before the HKD can consider shifting its peg to the CNY. First, the CNY must be fully convertible. Second, China must have an open capital account without capital controls. Third, China s financial markets must have sufficient breadth and depth to provide the Exchange Fund the assets for the monetary base. Finally, the economic cycles between Hong Kong and China needs to be more synchronized. USD/HKD outlook Shaded area: Convertibility band Ceiling Floor % appreciation a year in HKD vs USD Width ±.6% around mid 9

10 Taiwan dollar USD/TWD to hold above 3 USD/TWD bottomed at on 22 May, around the same time when the overall monitoring index signalled that the Taiwan economy had turned sluggish in April after nine straight months of stable growth. The index remained sluggish in May and June. The TWD s appreciation from Jan 216 to May 217 was the strongest in Asia because the economy had emerged from recession in 2Q16 with growth hitting the cycle s high at 2.79% YoY in 4Q16. Since then, growth has slowed two straight quarters to 2.6% in 1Q17 and 2.1% in 2Q17. This was in line with the trajectory projected by Directorate General of Budget, Accounting and Statistics (DGBAS). To achieve its full year growth target of 2.5% in 217, DGBAS expects growth to slow further to 1.87% in 3Q17 and 1.66% in 4Q17. Understandably, the central bank is in no hurry to hike rates. More so with inflation staying below its 1.7% target this year. CPI inflation slowed to an average.6% YoY in 2Q17 from.8% in the previous quarter. The discount rate was last lowered by 12.5bps to 1.375% in Jun 216. We expect this rate to remain unchanged in the next four quarters. USD/TWD outlook Ceiling Floor % depreciation a year in TWD vs USD Width ±6.7% around mid Korean won USD/KRW in a range since March USD/KRW closed at a new year s low of on 27 Jul, which was around it previous low of on 27 Jul. Since Feb, USD/KRW has been fluctuating in a range between 1112 and In the first 7 months of this year, the KRW appreciated 7.5% vs USD to become the best performing Asian currency. Investor optimism in Korea was better reflected by its relentless stock market bull run. KOSPI has been achieving new record highs since May. It was around this time that the country moved on from a long-drawn political scandal into a recovery story. The KOSPI rallied 2% in the first 7 months to become the top performer in East Asia. In July, policymakers upgraded their 217 growth forecasts. The Bank of Korea now expects growth to come in at 2.8%, while the Ministry of Strategy and Finance is more optimistic about hitting 3%. Previously, both expected growth of 2.6%. Real GDP growth slowed to 2.7% YoY in 2Q17 from 2.9% in 1Q17. The finance ministry would need growth to accelerate to 3.2% in 2H17 in order to achieve its 3% goal. With the extra budget adding.2% to growth, global trade will need to hold upstrongly for the rest of the year. USD/KRW outlook Ceiling Floor % appreciation a year in KRW vs USD Width ±9.1% around mid 1

11 Singapore dollar USD/SGD to stabilize in a range USD/SGD came under heavy selling pressure in July from heightened speculation that the major central banks were moving to join the Fed in exiting their ultra-loose monetary policies. USD/SGD fell towards the floor of our previous projected. According to our model, this lifted the SGD nominal effective exchange rate (NEER) into the strongest quartile of its zero appreciation policy band. This was inconsistent with Singapore s lacklustre economic and inflation data. First, CPI inflation fell to.5% YoY in Jun17 from 1.4% in the previous month. Effectively, headline inflation retreated from the ceiling to the floor of its official.5-1.5% forecast range for 217. Second, advance estimate for real GDP growth came in at.4% QoQ saar in 2Q17, well below the 1.1% consensus. Growth for 1Q17 was also revised down to -1.9% from -1.3% previously. Hence, the Monetary Authority of Singapore (MAS) is likely to maintain its neutral stance for its SGD NEER policy at its next review in October. USD/SGD should also start to stabilize between and in 2H17. USD/SGD outlook Ceiling Floor % appreciation a year in SGD vs USD Width ±3.3% around mid Malaysian ringgit USD/MYR s downward bias remains intact USD/MYR fell to on 14 Jun, its weakest close for the year. At this level, the MYR appreciated 5.4% YTD against the USD. Since then, USD/MYR has been stable in a range. The currency pair ended 216 at So far, 217 had been a good year for the Malaysian economy and its markets. Real GDP growth expanded 5.6% YoY in 1Q17, above 5% for the first time since 1Q15. Trade growth rebounded to levels not seen since the V-shaped recovery from the global financial crisis. After four years of declines, foreign reserves rose to $99.1bn in Jul17 from $94.6bn at end-216. Similarly, Malaysian stocks ended three years of scandalled weakness and rallied in 217. At its strongest close on 14 Jun, which was a level not seen since May 215, the FTSE Bursa Kuala Lumpur Composite Index rose 9.2% YTD. Against this favourable background, the government may bring forward the 14th general election due in Aug 218 into this year. If so, most expect this to take place in the final quarter. Investors expect the financial markets to perform well during this period. USD/MYR outlook Ceiling Floor % depreciation a year in MYR vs USD Width ±7.5% around mid 11

12 Thai baht USD/THB to settle into a range between 32.4 and 33.9 Appreciating 7.6% vs the USD, the THB was the second best performing Asian currency in the first seven months of this year. This was twice the average 3.6% pace seen in AXJ currencies. Understandably, the Bank of Thailand (BOT) has become concerned that the THB may have risen too much too quickly in recent months. Despite healthy trade growth, CPI inflation turned negative for a second straight month in Jun17. Core inflation, while positive, had remained below the official 1-4% target range for 25 months. The Thai economy today is sounder compared to the Asian crisis 2 years ago. In contrast to deep deficits back then, the current account posted a solid surplus of 11.4% of GDP in 216. Foreign reserves were high at $185.6bn in Jun17, which comfortably exceeded gross external debt of $134.9bn in 1Q17. In this regard, the THB s outperformance was not unreasonable. Overall, USD/THB remains tied to its regional peers. Given our expectation for the USD to eventually consolidate in the region, USD/THB should also settle into a range in 2H17. USD/THB outlook Ceiling Floor % appreciation a year in THB vs USD Width ±4.8% around mid Indonesian rupiah USD/IDR stable in a tight range In the first seven months of this year, USD/IDR traded 81% of the time within a tight range. We continue to expect the IDR to remain stable for the rest of 217. Instead, optimism was reflected mainly in its stock market which had been posting new record highs after mid-march. Real GDP growth returned to 5%in 1Q17. Standard & Poor s, on 19 May, awarded Indonesia an investment grade debt rating. Bank Indonesia (BI) adopted a neutral policy stance after 6 rate cuts in 216. Between Jan17 and Jun17, CPI inflation rose to 4.37% YoY from 3.49% on higher electricity tariffs. But core inflation eased to 3.13% from 3.35% for the comparable period, and stayed near the floor of its 3-5% target band. According to local media, President Joko Widodo has welcomed BI s plan to rednominate the IDR. The draft bill will be discussed by the cabinet in a plenary session before it heads to the House of Representatives (DPR). The plan is to remove the last three digits from the IDR without affecting its value. Introducing the new currency notes will be carried out in two phases 22 to 224 and 225 to 228. USD/IDR outlook Ceiling Floor % depreciation a year in IDR vs USD Width ±5.6% around mid 12

13 Philippine peso USD/PHP moves into in a higher 5-51 range Bucking the globally weak USD trend, USD/PHP rose into a higher 5-51 in the second half of June. USD/PHP fluctuated between 49.3 and 5.4 in the first half of the year. The PHP was the worst performing Asian currency this year. Bangko Sentral ng Pilipinas (BSP) expects a current account deficit of $6mn in 217, its first shortfall since 22. BSP also expects the shortfall to widen further to $1.6bn in 218 due to record-wide trade deficits. CPI inflation retreated to 2.8% YoY in Jun17 from the year s high of 3.4% in Mar/Apr17. With inflation within its 2-4% target range, BSP saw no urgency to raise rates. Neither was it too concerned about the PHP s depreciation on inflation. Moody s is monitoring for signs of overheating in the Philippine economy, in particular, the re-emergence of the current account deficit and rising inflation. This view was rejected by the Department of Finance. Nonetheless, markets will continue to monitor the trade deficits which have not only widened to more than 8% of GDP, but also looks set to overtake overseas foreign worker remittances. USD/PHP outlook Ceiling Floor % depreciation a year in PHP vs USD Width ±2.6% around mid Vietnam dong USD/VND crawling upwards along the middle of our projected trading band As end-july, the State Bank of Vietnam (SBV) has weakened the official VND rate by 1.2% YTD vs the USD to Despite this, spot USD/VND was last at 22735, slightly below the rate it ended 216 at. Real GDP growth recovered to 5.73% YTD in Jun17 vs 5.52% the same period a year ago. Our economist expects full-year growth to improve to 6.3% in 217 from 6.2% in 216. To help the economy achieve its % target for 217, the State Bank Vietnam (SBV), on 7 Jul, surprised with a 25 bps cut in its refi rate to 6.25%. With effect from 1 Jul, the maximum short-term lending rate was lowered by 5 bps to 6.5%. The rate cut was possible because CPI inflation fell to 2.5% YoY in Jul17 from the year s high of 5.2% in Jan17, well below its official 4% target this year. The trade deficit widened to $2.7bn in 1H17, morethan-doubled the $1.3bn seen for the whole of 216. As a percentage of GDP, the deficit was, however, small at.8%. To keep the VND stable from these deficits and rising US rates, the SBV imposed a % cap on USD deposit interest rates. USD/VND outlook Pink/gray shaded areas are upper/lower halves of official trading band Ceiling Floor % depreciation a year in VND vs USD Width ±2.1% around mid 13

14 Indian rupee USD/INR to remain stable between 64 and 65 INR started the year on a strong note; it appreciated 6% YTD vs the USD to 64.6 by mid-may. Since then, USD/INR has been in a tight range. There are no incentives for the INR to resume its appreciation. Investor optimism in India continues to be reflected by its record high stock market. Real GDP growth slowed, for the fourth straight quarter, to 6.1% YoY in 1Q17 from its peak of 9.1% in 1Q16. CPI inflation fell to an all-time low of 1.54% YoY in Jun17, below the official 4±2% target range. At its next meeting on 2 Aug, the Reserve Bank of India (RBI) is expected to lower its repo rate by 25bps to 6.%. Trade lost momentum in recent months. Exports growth peaked at 27.6% YoY in Mar17 and plunged to 4.4% in Jun17. Imports growth peaked at 49.1% in Apr17 but remained high at 19.% in Jun17. For the first time in 4 years, the trade deficit in the first 3 months of the new FY17/18 (Apr-Mar) did not narrow, but more-than-doubled to $4.1bn. In 216, India s largest trade deficit was with China ($48.8bn) which dwarfed its largest surplus with the US ($25.4bn). In keeping USD/INR stable in a weak USD environment, the CNY and other currencies appreciated against the INR. USD/INR outlook Shaded area: Narrowing price channel Ceiling Floor % depreciation a year in INR vs USD Width ±6.2% around mid Australian dollar AUD/USD may have moved into a higher Until mid-july, AUD/USD had been consolidating between.7145 and.7778 in the past 14 months. AUD/USD appreciated strongly between 1 Jun and 31 Jul, by 8.5% from a low of.7374 to.83, its highest level since May 215. At its strongest level this year, AUD/USD rose 11.% YTD. Understandably, the Reserve Bank of Australia (RBA) has become concerned with the surge in the exchange rate within a short period of time. It has repeatedly warned that an unwarranted appreciation could complicate the economic adjustment from the end of the mining boom towards services and manufacturing. In its Statement on Monetary Policy in May, the RBA noted that the AUD s appreciation may have added some downward pressure on prices. Indeed, CPI inflation fell to 1.9% YoY in 2Q17 from 2.1% in 1Q17, below the RBA s 2-3% target range. The next monetary policy statement on 4 Aug is likely to reinforce the same warning on how a strong AUD could hurt its growth/inflation outlook. Hence, the RBA is unlikely to be considering rate hikes from now till 219; it expects growth and inflation to return to 3% in 219. AUD/USD outlook Shaded area: Stepped price ranges Ceiling Floor % appreciation a year in AUD vs USD Width ±1.8% around mid 14

15 Recent Research CN: has go global gone into reverse? 31 Jul 17 ID: playing catching up 31 Jul 17 CNH: bond connect tracker 17 Jul 17 TW: a temporary pause 11 Jul 17 FX: steady ECB, stable EUR 4 Jul 17 VN: stability is key 26 Jun 17 IN: GST set for kick-off 23 Jun 17 TH: the deleveraging drag 23 Jun 17 US: a mulish consistency 21 Jun 17 SGS: carry environment 2 Jun 17 IN: window opens for a rate cut 19 Jun 17 CN: more monetary flexibility 19 Jun 17 PH: to lead hikes in ASEAN 15 Jun 17 JP: BOJ s exit will take time 14 Jun 17 Qtrly: Economics-Markets-Strategy 3Q17 8 Jun 17 Global: on sentiment, cycles and 6-year 1 Jun 17 track records EZ: ECB not ready yet 23 May 17 CN: reality check 16 May 17 IN: RBI on the defensive 16 May 17 KR: after the election 12 May 17 US: unwinding QE 4 May 17 FX: USD s hopes Trumpled 3 May 17 IN: time for an upgrade? 28 Apr 17 Rates: global rates roundup 25 Apr 17 TW: Trump and Taiwan, revisited 2 Apr 17 ID: stronger rupiah a boost 2 Apr 17 CNH: room to loosen controls 13 Apr 17 IN: watching state finances 12 Apr 17 SGD: neutral for a long time to come 7 Apr 17 SGS: FX tailwind at the limit 7 Apr 17 IN: structural tailwinds to add to cyclical 31 Mar 17 upswing KR: is optimism justified? 29 Mar 17 IN: monetary policy on cruise control 27 Mar 17 TH: narrower C/A surplus a plus 21 Mar 17 SG: ensuring fiscal sustainability 2 Mar 17 Qtrly: Economics-Markets-Strategy 2Q17 9 Mar 17 Asia: Trump and the state of US-Asia trade 7 Mar 17 CN: the rise and rise (and rise) of the RMB 24 Feb 17 ID: next move is a rate hike 21 Feb 17 SG budget: building the future economy 21 Feb 17 CN: what to watch for as PBoC tightens 2 Feb 17 SG: upgraded 2 Feb 17 TW: Trump s policies and Taiwan 15 Feb 17 SG: shaping the future 6 Feb 17 FX: USD strength hits a roadblock 3 Feb 17 IN budget: a balanced approach 2 Feb 17 Rates: global rates roundup 2 Feb 17 TW: shifting into higher gear 27 Jan 17 Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts and tables are CEIC and Bloomberg unless otherwise specified. DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore Tel: Company Registration No E. 15