Economies, Currencies, Rates Daily Breakfast Spread

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1 Economies, Currencies, Rates Daily Breakfast Spread DBS Group Research 6 November 2013 Economics 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. Southeast Asia, India IN: There has been a timely emphasis on rebuilding the economy s foreign reserves, tapping the present phase of relative calm. The FX reserves stock troughed out at slightly below USD 275bn in the first week of Sep13 (three-year low), down from USD 293 at the start of this fiscal year. As of 29 Oct, the reserves stood at USD 283bn. Apart from the valuation effects, the near USD 18bn drop since Apr13 had much to do with the central bank s defence against the rapid pace of rupee depreciation. The erosion in the FX reserves stock also saw the related adequacy ratios namely import coverage and external debt adequacy ratios weaken in tandem. The import cover had slipped to 7months, down from 13months in Equally worrying was the decline in the coverage of the external debt position by the existing FX reserves stock, which fell to 73% by Jun13, after peaking at 138% in While the reserves were more than adequate to meet short-term debt obligations, concerns had mounted on the ammunition to ward off another bout of the currency rout and capital outflows. G3 The authorities plan to rebuild the foreign reserves to USD 300bn by end-year. Few steps have been initiated towards this pursuit, primarily to attract more capital inflows. Foremost amongst which was the swap window for banks for foreign currency non-resident (FCNR-B) deposits and higher overseas borrowing limit for banks. As of late-oct, these schemes have raised estimated USD 12bn. The other measures include review and liberalisation of FDI ceilings in selected sectors and easing regulations for external commercial borrowings (ECBs). Plans are also afoot to include government borrowings to select global bond indices, which could potentially ramp up another USD 20bn. Further, the expected correction in the current account deficit (DBS IN: Current account woes to take a breather, 18Oct13) will also prevent a drawdown of the foreign exchange reserves. While it is less than ideal to accumulate dollar reserves on borrowings, emphasis is still on restoring confidence and averting a deja-vu sell down in the currency. Our FX Strategist had pointed out in the 24Oct note, that the weak USD could be used to accumulate reserves and this will prevent a fall in the USDINR. In this regard, the decision on the timing to allow oil demand back i.e. unwinding of the swap window for oil marketing companies, will also be crucial. A gradual rollback of this window might be timed with the closure of the FCNR B and banks borrowing limit arrangement (latter two are slated to end by end-nov). While these manoeuvres have been priced in, some buoyancy in the currency pair should be expected when these are eventually unwound. JP: One upside surprise from the recent data is that construction orders jumped strongly by 42.2% MoM sa (89.8% YoY) in September. The rise in construction orders during H13 was mainly driven by civil engineering works (roads and railways), reflecting the reconstruction demand after the 2011 earthquake disaster. By contrast, the September s surge was driven by increase in private sector orders, largely due to demand for building hospitals, schools and offices. The recent news about deregulations in the medical and education sectors within special economic zones may have boosted business sentiment, helping 1

2 explain the sharp increase in construction orders. The initiatives proposed so far include setting up international schools in the zones and allowing foreign doctors to practice. The actual impact on investment still depends on the final details about the scope of business opening. Based on the available information, far reaching reforms such as relaxation of employment and labor laws will be excluded in the zone, which might be a disappointment to foreign investors. Separately, the indicators for residential construction (condominium sales, prices, housing starts) have also picked up in recent months. Higher inflation expectations and declines in the long-term real interest rates should have boosted housing demand. However, it is questionable whether the rise in inflation (caused by yen depreciation) is sustainable, and whether interest rates can remain low when inflation expectation is on the rise. Meanwhile, the increase in housing market activity may have been exaggerated due to the front-loading of home demand ahead of next year s consumption tax hike. Currencies FX: Currency markets have not been doing much in the past week, with most exchange rates trapped in familiar ranges. The US 10Y government bond yield rose to almost 2.67% yesterday when ISM non-manufacturing PMI beat expectations and eased concerns about the impact of the government shutdown on the economy. While this kept taper hopes alive, markets were not about to price in expectations for the Fed to start hiking rates. The 2Y bond yield edged lower to %, while the implied yield for Fed Fund Futures maturing in December 2014 eased to 0.185%. Recent comments by Fed officials suggested that the Fed is adopting a wait-andsee approach to assess the impact of US fiscal/debt uncertainties on the momentum of jobs and consumer confidence. Most Fed officials are seen staying more or less neutral ahead of Janet Yellen s nomination hearing as Fed chair before the Senate Banking Committee scheduled for November 14. Nonetheless, the USD has recovered against most currencies ever since the US 10Y treasury yield bottomed on October 23. Notably, emerging Asian currencies were most resilient during this period of short-covering. The two hardest-hit currencies during the summer volatility, the Indian rupee and Indonesian rupiah, depreciated only 0.1% and 0.7% respectively, small compared to the above-4% depreciation in the Brazilian real and South African rand. This tells us one thing. While markets are still guessing over the direction of QE3, Asia ex Japan currencies are paying attention to the improving global growth outlook, and the accompanying rise in their foreign reserves. USD short-covering after US 10Y government bond yield bottomed % change vs USD 23 Oct vs 5 Nov * USD is performance of DXY (USD) index -8 MAJOR CURRENCIES B R I C S EMERGING ASIA DXY NZD CAD GBP JPY AUD EUR CHF INR CNY RUB BRL ZAR VND HKD TWD PHP SGD MYR KRW THB IDR 2

3 Economic calendar Event Consensus Actual Previous Nov 4 (Mon) EZ: PMI composite (Oct F) US: factory orders (Sep) 1.8% m/m sa 1.7% m/m sa Nov 5 (Tue) TW: CPI (Oct) 1.05% y/y 0.64% y/y 0.83% y/y PH CPI (Oct) 3.2% y/y 2.9% y/y 2.7% y/y US: ISM non-manf. (Oct) Nov 6 (Wed) ID: GDP (3Q) 5.6% y/y 5.8% y/y EZ: retail sales (Sep) 0.6% y/y 0.7% y/y US: MBA mortgage app (Nov) 6.4% Nov 7 (Thur) TW: trade balance (Oct) USD 3.23bn USD 2.35bn -- exports -1.0% y/y -7.0% y/y -- imports 0.2% y/y -0.7% y/y US: initial jobless claims (Nov 2) 335K 340k US: GDP (3Q A) 2.0% q/q saar 2.5% q/q saar Nov 8 (Fri) TH: foreign reserves (Nov 1) USD 173.3bn US: nonfarm payrolls (Oct) 120K 148k US: unemployment rate (Oct) 7.3% 7.2% CN: trade balance (Oct) USD 24.3bn USD 15.2bn -- exports 1.5% y/y -0.3% y/y -- imports 7.4% y/y 7.4% y/y Central bank policy calendar Policy Date Country Rate Current Consensus DBS Actual This week 07-Nov MY OPR 3.00% 3.00% 3.00% 07-Nov EZ 7-day refi rate 0.50% 0.50% 0.50% Next week 12-Nov ID o/n reference rate 7.25% 14-Nov KR 7 day repo rate 2.50% Last week 29-Oct IN o/n repo 7.50% 7.75% 7.75% 7.75% 30-31Oct US FDTR 0.25% 0.25% 0.25% 0.25% 31-Oct JP Monetary Base Target JPY 270trn JPY 270trn JPY 270trnJPY 270trn 3

4 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 4Q13 1Q14 2Q14 3Q14 current 4Q13 1Q14 2Q14 3Q14 US Japan Eurozone Indonesia ,356 11,150 11,200 11,250 11,300 Malaysia Philippines Singapore n.a. n.a. n.a. n.a. n.a Thailand Vietnam^ ,100 21,310 21,340 21,380 21,410 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 2,157 - Hong Kong Ccy policy HSI 23, Taiwan TWSE 8, Korea Kospi 2, India Sensex 20, Source: Bloomberg 4

5 Contributors: Economics David Carbon Singapore (65) Irvin Seah Singapore (65) Tieying Ma Singapore (65) Radhika Rao Singapore (65) Gundy Cahyadi Singapore (65) Chris Leung Hong Kong (852) Currencies / Fixed Income Philip Wee Singapore (65) Eugene Leow Singapore (65) Nathan Chow Hong Kong (852) 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)

6 Recent Research Asia: the best thing about the outlook... 4 Nov 13 US Fed: Landlord to 8 million 28 Oct 13 CNH: Lifting the offshore conversion cap 25 Oct 13 CN: What is TPP and why does in matter? 23 Oct 13 US: Oct 13 IN: Current account woes to take a breather 18 Oct 13 MY: Towards fiscal reform 16 Oct 13 CN-US: Renminbi-izing the dollar 14 Oct 13 Asia cyclical dashboard: Better on the margin? 11 Oct 13 ID: BI and the new normal 9 Oct 13 IN: Room for front-end OIS rates to go lower 8 Oct 13 JP: Growth risk reduced, fiscal risk remains 4 Oct 13 CNH: Onshore deregulation, offshore 30 Sep 13 expansion India rates: Higher but not by much 26 Sep 13 CN: Shanghai Free Trade Zone & the 26 Sep 13 reinvigoration of China US: A pre-fomc pulse-check 16 Sep 13 Qtrly: Economics-Markets-Strategy 4Q13 12 Sep 13 US unemployment: call off the search 9 Sep 13 CNH: Will Qianhai jeopardize Hong Kong s 6 Sep 13 position? Asia-vu 3: Are we there yet? 5 Sep 13 IN: Down to fiscal support 4 Sep 13 US: Excess capacity, no inflation 21 Aug 13 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 CN: A blueprint for expanding RMB usage 7 Aug 13 Asia: New drivers, new risks the impact of a 2 Aug 13 slower China on regional economies and currencies 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 29 Apr 13 new highs JP: Abenomics - one achievement, three 17 Apr 13 challenges CN: Deepening economic ties with Russia 9 Apr 13 MY: Sing-Iskandar: Creating synergies 8 Apr 13 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. 6