Economies, Currencies, Rates Daily Breakfast Spread

Transcription

1 Economies, Currencies, Rates Daily Breakfast Spread DBS Group Research 20 August 2013 Economics Asia Asia: Asian currencies have fallen considerably since early-may, thanks in part to worries about Fed tapering, in part to a purported recovery in the West and, in the case of India, to fundamental problems here in the region that need to be addressed (see: IN: short-term focus, longer-term perils, 19 Aug). The rupee is down by 14% since 8May but the ringgit has fallen almost as much at 10%. The IDR is off by 7.5%. The 7% drop in the Philippine peso shows that this regional selloff, like most, is indiscriminate when it comes to fundamentals improvements in the Philippines had earlier pushed the peso to nearly its strongest level since December US Fed expectations Implied fed funds rate Dec13 Jun14 Dec14 Market Current wk ago DBS Source: Bloomberg fed fund futures Notes: Given a FF target rate of 0.25%, an implied FF rate of 0.30 is interpreted roughly as the market pricing in a 20% chance of a Fed hike to 0.50% from 0.25% (30 is 1/5th of the distance to 50 from 25). DBS expectations are presented in discrete blocks of 25bps, i.e., the Fed moves or it does not. See also Policy rate forecasts below. Asia currency depreciation since 8May % vs USD, 8May-19Aug CNY TWD KRW SGD THB PHP IDR MYR INR Is this the end of the road for Asia s currencies? Hardly. India needs some structural reform, that s for sure. The twin deficits (government and external) have been festering for years, the economy needs to be opened up to more competition and the political leaders can t seem to deliver. But elsewhere in the region it s mostly case of jitters about QE and a perception that growth in the West is back. Capital is flowing out of the region for both reasons. It probably won t take long to return. Capital has flowed into Asia over the past 3-4 years for two reasons: cyclical and structural. The first reason gets all the attention: US interest rates are at zero, the Fed is pursuing QE3: money comes flooding to Asia. That s part of the story the part that was never going to last. At some point, the US and Europe were always going to recover and central banks were always going to normalize policy. Those flows are going home, if probably a bit too soon. The so-called recovery isn t that grand. In fact it s pretty weak. In the US, we re used to thinking of growth grinding along at a 2%-ish sort of rate. But growth has averaged only 1% over the past 3 quarters and only 1.4% over the past 4. Recovery? Not so much. In Europe, growth has finally turned positive. That s great. But everyone expected that would happen about now and no one expects a return to normal growth anytime soon. Recovery? Put it this way: non-negative is a lot

2 different than positive. When it comes to cyclical inflows, QE might be winding down, but interest rates are likely to remain on the floor for a long time to come in the US, Europe and Japan. The bigger and longer lasting reason behind capital inflows into Asia has always been structural. Asia is where the growth in the world is taking place. It s where the new dollars of demand are being generated. And for this reason, it s where businesses will want to invest. Recovery might be coming in Europe. But Germany Europe s biggest driver would, if it grew at a 1.5% rate per year, double in size once every 50 years. Asia, by contrast, adds a Germany every 4 years, right here in Asia. If you re a business, where would you want to invest? Where a new Germany gets created every 50 years? Or every 4? It s not rocket science. Asia will be the destination for a lot of capital inflow for a long time to come. Greater China, Korea TW: According to the latest statistics, RMB deposits in Taiwan s banking sector have reached CNY 76.9bn as of the end of July. Since the offshore yuan business started in the beginning of this year, RMB deposits had been growing at a rapid pace of CNY 10bn per month in February-May before slowing to a more normal pace of CNY 5bn recently in June-July. Based on the current growth rate, the size of RMB deposits will hit CNY 100bn by the end of this year (combining deposits in the domestic and the offshore banking units). Although the expectations of RMB appreciation are waning, the favorable interest rate differentials have continued to provide incentives for Taiwanese investors to switch into RMB deposits. The interest rates offered by local banks on the one-year RMB deposits currently range from 1% to 2%, compared to only % on the TWD deposits. The profit margin of RMB loans is far better than that of TWD loans. The RMB lending rates quoted by several local banks are as high as 5-6%, while the base rate of TWD loans is only 2.88% on average. Meanwhile, banks can obtain a decent return of more than 3% by placing their RMB deposits with the Bank of China s Taipei branch. The short-term redeposit rates have also risen in recent months as a result of the liquidity squeeze in China s banking sector. In the RMB bond market, there have been five Formosa bonds raising funds of CNY 3.9bn so far this year. In the near term, the new issuance of Formosa bonds could be delayed, given the ongoing rise in global bond yields and the higher risk premiums demanded for RMB products. In the medium term, the Formosa bond market should still benefit from policy support. The Financial Supervisory Commission has announced in July to relax rules on the issuance of foreign currency corporate bonds in Taiwan, including removing the requirement of credit ratings. In order to achieve the official target of boosting the annual issuance of Formosa bonds to CNY 60bn by 2015, more policy initiatives should be on the cards. The next possible step is to allow Chinese enterprises and financial institutions to issue RMB bonds in Taiwan. Southeast Asia, India MY: Inflation for July is on tap tomorrow and the headline number is expected to post a reading of 2.0% YoY. This is up from 1.8% in the previous month and much in line with our long held expectation that the price barometer will breach the 2% level moving into the second half of the year. Base effect is at play but the strong domestic demand is certainly stoking inflationary pressure despite the government s price stability programme. Demand pull pressure should see inflation reading inching high. But with the lack of external inflationary pressure due to a weak global economy, the upside risk to domestic inflation remains modest despite a weaker currency. The ringgit has been under tremendous pressure of late due to the risk on the current account. That said, July coincides with the Ramadan festive season. Hence, don t be surprise if headline inflation comes in higher than expected due to the festive season demand pressure. Prices of basic necessities will typical rise during such times. 2

3 ID: The current account deficit widened to USD 9.8bn in 2Q13, an amount equivalent to 4.4% of GDP. The worsening of the current account was largely driven by the emergence of the first quarterly goods deficit (in bop terms) since data began in Notably, the current account figure is even wider than the previous high of USD 8.2bn registered in 2Q12. Worries about external funding have led to portfolio outflows, which have manifesting as rupiah weakness over the past few weeks. Yesterday, the benchmark Jakarta Composite Index also corrected by 5.6%. G3 In order to restore stability in the external accounts, policy makers have already taken steps to tighten monetary policy (FASBI rate hikes, an increase in secondary reserve requirement ratio) over the past few months and have also cut fuel subsidies in June. These steps are likely insufficient. Higher interest rates are needed to attract foreign portfolio inflows and to ensure that imports stay moderate. As such, we think further tightening via the FASBI deposit rate is likely over the medium term as the authorities maintain their focus on economic stability as opposed to economic growth. A recovery in external demand and commodity prices would be a boon. There have been tentative signs of the economy bottoming out in China and hints of economic stabilization in Europe. An improvement in export values would help tip the trade balance back into surplus, reducing overall stress on the external accounts. EZ: The signs of nascent stabilisation in incoming data out of the Eurozone and modest upside surprise in advance estimates of 2Q13 GDP last week has complicated policy direction for the ECB. This comes just as the central bank wants to maintain borrowing costs at accommodative levels, irrespective of which shortterm rates have been inching up. The overnight EONIA averaged 0.09% between Jun-Aug13 (to date), up from 0.07% in Jan-May13. The rate treaded close to 0.10% in the second half of Jul13 despite the central bank s clearly dovish guidance at the early-jul followed by Aug13 policy reviews. Firstly, uncertainty over the Fed QE tapering exercise and the subsequent pressure to normalise rates has been the major driver of the uptick in the interbank and borrowing costs. Secondly, the gradual tightening in liquidity conditions as the LTROs are being repaid is also providing a floor to short-term rates. In this respect, September will be an important timeline to monitor and the possible timeline for the Fed s withdrawal of the asset purchases. If the European short-term rates continue to inch higher, the pressure on the central bank will build to back-up the dovish assurances with directed action. The first line of defence will be to cut the main refinance rate further. This might be tapped despite insufficient justification as inflation whilst below official targets, has not triggered deflationary concerns. Any cut in the main refinance rate could be accompanied by a reduction in the deposit facility rate to negative terrain. The other course of action could include the easing of collateral rules for loans extended to small and medium enterprises. More liquidity-enhancing measures akin to LTRO-like tranches assuage concerns at the margin, is another option on the table. Finally, taking a leaf off US Fed s book, the ECB could announce explicit economic thresholds on inflation or unemployment which could trigger a reversal in the policy bias. Understandably this will be a cumbersome exercise given the economically divergent member countries, nonetheless will provide the markets with clear thresholds for concomitant policy action. The official rhetoric thereby will be watched closely to gauge if policymakers favour any fresh measures to drum home their dovish leaning and arrest the premature rise in borrowing costs and short-term rates. Currencies INR: The Indian rupee (INR) depreciated to a new all-time low of against the US dollar yesterday. The pressure is coming from higher US long bond yields from expectations for the Fed to start tapering in September. The INR has lost 13.1% of its value so far this year, which makes 2013 its fifth worst annual performance since the Plaza Accord in

4 USD/INR at record high near the top of a new rising price channel Fed tapering fears Eurozone crisis 40 Lehman crisis The other four years that beat this year, ranked in the order of losses, were 1988 (-14.9%), 2011 (-15.5%), 2008 (-18.9%) and 1991 (-29.6%) was also the year that India suffered a balance of payments crisis from weak external growth and high oil imports. Repeating 1991 would bring USD/INR up to 78. But this is not 1991 when the US was suffering a property-led recession and record high oil prices from the First Gulf War. The world economy is emerging from the Eurozone crisis; Eurozone has already ended its six-quarter recession in 2Q13. In fact, like during the 2008 Lehman crisis, USD/INR had already moved from the bottom to the top its price channel during the Eurozone crisis. What brought USD/INR out of this price channel was Fed tapering worries that started in May. Hence, the year that probably had most in common with 2013 was probably 1988, when the US Fed Funds Rate started to rise from 6.50% to 9.75% a year later. The chart below shows USD/INR probably trading into a new price channel with a steeper gradient. While the new channel shows USD/INR moving to a higher range into 2014, it also highlights that USD/ INR is at the top of the channel. In this regard, tonight s FOMC minutes will be important to watch. The same can be said for Kansas Fed symposium at Jackson Hole this weekend. With markets starting to link weak US stocks to emerging markets, Fed officials may well start to sound less hawkish and more cautious about recovery prospects. Fixed Income TH: THB swap rates have tracked US swap rates higher over the past 3 months. However, the magnitude of the change in front-end THB swap curve (1Y & 2Y swap rates) has been relatively small. Notably, 1Y and 2Y THB swap rates 1Y, 2Y & 3Y THB Swap Rates vs 6M THB FIX %pa Y THB Swap 2.3 2Y THB Swap 2.1 1Y THB Swap 1.9 6M THB FIX Jan-13 Apr-13 Jul-13 2Y Swap Rates vs 6M THB FIX %pa M THB FIX (lhs) 2Y THB Swap - 6M THB FIX (rhs) 0 Jan-07 Jan-09 Jan-11 Jan-13 bps

5 have risen by just 9bps and 14bps respectively since end-may. While there has historically been a high correlation between US and THB swap rates, we think that domestic factors may be more dominant for the front-end of the THB swap curve in the short term. The trajectory of the FX-implied 6M THBFIX (which serves as the floating leg of onshore THB swaps) broadly depends on the policy rate direction and onshore liquidity in the domestic financial system. Over the course of the next four quarters, policy rates are likely to stay low to support the domestic economy as growth momentum further eased from 1Q (GDP contracted by 0.3% QoQ sa in 2Q). Moreover, there is no pressing need to raise policy rates to curb inflation (inflation edged down to 2.0% YoY in July) or to manage external imbalances. Externally, an improvement in the global economy should also result in an improvement in domestic liquidity via higher export values and portfolio inflows. Both of these suggest that upward pressure on front-end swap rates (1Y & 2Y) are likely to be more muted than they otherwise would have been (given likely upward pressure from rising US interest rates over the medium term). 5

6 Economic calendar Event Consensus Actual Previous Aug 19 (Mon) JP: trade balance (Jul) -JPY 773.5bn -JPY bn -JPY 182.3bn -- exports 12.8% y/y 12.2% y/y 7.4% y/y -- imports 16.0% y/y 19.6% y/y 11.8% y/y TH: GDP (2Q) 3.3% y/y 2.8% y/y 5.3% y/y Aug 20 (Tue) JP: all industries activity index (Jun) -0.7% m/m sa 1.1% m/m sa TW: export orders (Jul) -1.0% y/y -3.5% y/y HK: CPI (Jul) 4.8% y/y 4.1% y/y Aug 21 (Wed) MY: GDP (2Q) 4.7% y/y 4.1% y/y MY: CPI (Jul) 2.0% y/y 1.8% y/y US: existing home sales (Jul) 5.15mn 5.08mn Aug 22 (Thur) TW: unemployment rate (Jul) 4.18% 4.17% EZ: PMI composite (Aug A) US: initial jobless claims (Aug 17) 330k 320k Aug 23 (Fri) SG: CPI (Jul) 2.1% y/y 1.8% y/y TW: industrial production (Jul) % y/y -0.43% y/y US: new home sales (Jul) 487k 497k EZ: consumer confidence (Aug A) Central bank policy calendar Policy Date Country Rate Current Consensus DBS Actual This week 21-Aug TH 1 day repo 2.50% 2.50% 2.50% Next week No policy meeting Last week 15-Aug ID o/n reference rate 6.50% 6.50% 6.50% 6.50% 6

7 GDP & inflation forecasts GDP growth, % YoY CPI inflation, % YoY f 2014f f 2014f US Japan Eurozone Indonesia Malaysia Philippines Singapore Thailand Vietnam China Hong Kong Taiwan Korea India* * India data & forecasts refer to fiscal years beginning April; inflation is WPI Source: CEIC and DBS Research Policy & exchange rate forecasts Market prices Policy interest rates, eop Exchange rates, eop current 3Q13 4Q13 1Q14 2Q14 current 3Q13 4Q13 1Q14 2Q14 US Japan Eurozone Indonesia ,533 9,850 9,800 9,750 9,700 Malaysia Philippines Singapore n.a. n.a. n.a. n.a. n.a Thailand Vietnam^ ,095 21,100 21,200 21,300 21,400 China* Hong Kong n.a. n.a. n.a. n.a. n.a Taiwan Korea India ^ prime rate; * 1-yr lending rate Policy rate 10Y bond yield FX Equities Current Current 1wk chg Current 1wk chg Index Current 1wk chg (%) (%) (bps) (%) (%) US S&P 500 1, Japan Topix 1, Eurozone Eurostoxx 2, Indonesia JCI 4, Malaysia KLCI 1, Philippines PCI 6, Singapore Ccy policy FSSTI 3, Thailand SET 1, China S'hai Comp 2, Hong Kong Ccy policy HSI 22, Taiwan TWSE 7, Korea Kospi 1, India Sensex 18, Source: Bloomberg 7

8 Contributors: Economics David Carbon Singapore (65) Irvin Seah Singapore (65) Tieying Ma Singapore (65) Radhika Rao Singapore (65) Eugene Leow Singapore (65) Chris Leung Hong Kong (852) Currencies / Fixed Income Philip Wee Singapore (65) Jens Lauschke Singapore (65) Nathan Chow Hong Kong (65) Administrative support Violet Lee Singapore (65) Please direct distribution queries to Violet Lee on Client Contacts Singapore DBS Bank (65) DBS Nominees (Pte) Ltd (65) DBS Vickers Securities (65) The Islamic Bank of Asia (65) China DBS Beijing (86 10) DBS Dongguan (86 769) DBS Guangzhou (86 20) DBS Hangzhou (86 571) DBS Shanghai (86 21) DBS Shenzhen (86 755) DBS Suzhou (86 512) DBS Tianjin (86 22) Hong Kong DBS Hong Kong (852) DBS Asia Capital (852) India DBS Chennai (91 44) DBS New Delhi (91 11) DBS Mumbai (91 22) Indonesia DBS Jakarta (62 21) /8 DBS Medan (62 61) DBS Surabaya (62 21) Japan DBS Tokyo (81 3) Korea DBS Seoul (82 2) Malaysia DBS Kuala Lumpur (6 03) DBS Labuan (6 08) Hwang-DBS Penang (6 04) Philippines DBS Manila (63 2) Taiwan DBS Changhua (886 4) DBS Kaohsiung (886 7) DBS Taichung (886 4) DBS Tainan (886 6) DBS Taipei (886 2) DBS Taoyuan (886 3) Thailand DBS Bangkok (66 2) United Kingdom DBS London (44 20) UAE DBS Dubai (97 1) USA DBS Los Angeles (1 213) Vietnam DBS Hanoi Rep Office (844) Ho Chi Minh City (84 8)

9 Recent Research IN: Short-term focus, longer-term perils 19 Aug 13 SG: Restructuring on track 16 Aug 13 TW: Coping with China s transition 15 Aug 13 Asia: new drivers, new risks the impact of a slower China on regional economies and currencies 2 Aug 13 CNH: Key messages from the Sino-US Dialogue 30 Jul 13 CNH: PBoC relaxes rules for RMB crossborder 12 Jul 13 activities TW: Less vulnerable than most 9 Jul 13 US Fed: Three up, three down 8 Jul 13 Asia cyclical dashboard: grinding it out 3 Jul 13 IN: Fretting over Fed QE 28 Jun 13 US Fed: too hot to trot? 24 Jun 13 VN: At easing s end 21 Jun 13 TH, ID, PH: Roadmap to Jun 13 Qtrly: Economics-Markets-Strategy 3Q13 13 Jun 13 Asia property: How high the moon? 4 Jun 13 CN: Sino-South Korean economic 29 May 13 relationship CNH: Qianhai to offer CNH trust products 16 May 13 KR&TW: Examining the yen s impact 7 May 13 CN: Sino-Australian relationship reaching new highs 29 Apr 13 JP: Abenomics - one achievement, three challenges 17 Apr 13 CN: Deepening economic ties with Russia 9 Apr 13 MY: Sing-Iskandar: Creating synergies 8 Apr 13 SGD policy - a balancing act 5 Apr 13 IN: Where to inflation? 4 Apr 13 PH: Harnessing liquidity 3 Apr 13 US Treasuries: Expensive 1 Apr 13 TW: Is Taiwan exiting China? 27 Mar 13 CNH: RQFII will not deplete offshore liquidity 21 Mar 13 Qtrly: Economics-Markets-Strategy 2Q13 24 Mar 13 CN: A global RMB: Inventing the necessary 11 Mar 13 CN: Interest rates must rise 8 Mar 13 IN: Pragmatic budget, tough to meet 1 Mar 13 TH: Keeping an eye on excesses 27 Feb 13 SG budget: Another push on restructuring 26 Feb 13 CN: The new push for urbanization 22 Feb 13 CNH: Singapore and Taiwan style 19 Feb 13 The fall and fall of Japanese FDI into Asia 19 Feb 13 SG budget: Focusing on the longer-term 18 Feb 13 Asia: cyclical dashboard 14 Feb 13 IN: Exception to the rule 6 Feb 13 CNH: Eclipsing the NDF market 4 Feb 13 JP: USD/JPY to go triple-digit 31 Jan 13 Asia: Weaker JPY does not imply weaker AXJ 30 Jan 13 US unemployment: Which trend is your friend? 29 Jan 13 ID: Fuel price pressures Asia: towards a better Jan13 18Jan13 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. 9