Asia monthly update October EM sell-off
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1 Asia monthly update October EM sell-off Anders Svendsen, Chief EM Analyst 27 October 2017 Natalia Kornela Setlak, Graduate
2 Update on Asia and selected Asian countries 3 Financial forecasts 20 Contacts & Disclaimer 23 Nordea Markets Singapore Branch Magnus Karlsson Jussi-Pekka Lyytinen Daniel Aagaard Pedersen Fredrik Fremberg Nordea in Asia Corrado Lillelund Forcellati Antti Oksala Research in Asia Amy Yuan Zhuang, CFA (maternity leave) Research coverage of Asia Anders Svendsen Tuuli Koivu Natalia Kornela Setlak
3 Executive summary Asian currencies have delivered a very strong performance YTD, as the markets do not seem to care too much about North Korea or the Middle East crisis. However, Asian FX have mostly weakened since the latest Asia Monthly publication as a result of rising US yields prompting a strong USD performance, which outweighed the positive domestic factors. The probability of a December rate hike from the Fed has increased again and the renewed USD strength story has played out, as we initially expected. We continue to see further USD gains on the horizon in Q4. Such a development would dampen any possible appreciation of the Asian currencies in the remaining part of this year. USD/CNY has moved up, following the sharp CNY appreciation during the summer. We expect Q4 to be a USD quarter, thereby limiting strengthening in the short term. USD/CNY will in our view stabilise around 6.65 for now, followed by a gradual decline towards 6.50 at end Given our USD forecast, we expect other Asian FX to take a breather in Q4 and continue to perform well next year when the USD will get a bit weaker. Our relatively bearish picks this year: SGD and PHP. Our relatively bullish picks this year: INR and MYR. 3
4 Recent research related to Asia China Economic Outlook: Towards the Party Congress and beyond 18 September China Monthly: Time to Party (Congress) 6 October Party Congress lays ground for China s future policies 12 October CNY: Still too strong 18 September China s Party Congress on its way 18 October China s strong GDP growth numbers confirmed by grass-root level discussions 19 October China: Our main takeaways from the Party Congress 25 October India Economic Outlook: Cooling off for now 19 September 4
5 Asia: Stable inflation and continued good economic momentum Good economic momentum continues with most of the PMIs trailing around their multi-year highs and all PMI indexes in expansion territory. The BI has cut interest rate once again, which lowered the policy rate to 4.25%. Further easing might come in India at the RBI s December meeting, if price pressures do not accelerate and the INR wipes out some of the recent losses. Changes in inflation were mixed. However, the inflation level remains low in all the countries with the highest reading in Malaysia and Indonesia, still clearly below 4.0%y/y. We expect the good economic momentum around the world to last longer, which should support growth in the export-based Asian economies. 5
6 Asian FX: Sentiment shift The long-standing positive risk sentiment, spurring FX returns across the EM markets, turned last month, prompting significant losses in Asian FX. The IDR, the SGD and the PHP suffered the most, but most of the currencies recorded losses against the stronger USD. We expect the USD to continue strengthening in the remaining part of the year, implying that Asian FX might continue to experience some tougher days. More hawkish pricing of the Fed should continue to underpin the dollar. Nevertheless, it is worth keeping in mind that this year s performance among the Asian FX remains outstanding with only the PHP recording notable loss. 6
7 China: Party Congress The Chinese 19 th Party Congress has just concluded. Nominations to the committees respected the retirement rule and Xi s close ally Wang Qishan had to leave it. There was no young members nominated for the Standing Committee to be the obvious successors of Xi. Read more here. GDP growth continued at a robust pace, though noting a slight slowdown to 6.8%y/y in Q3 on the policy tightening. Moreover, the shift towards an economy more reliant on private consumption continued. Credit growth continues to outpace economic growth, leading to increases in the debt ratios. Official bank lending statistics YTD are once again at significantly higher levels than in
8 CNY: Stable for the remainder of this year The CNY appreciated markedly during early summer. Just as we pointed out last time, USD/CNY has been pushed too low before and it has recently given away these gains, partly due to renewed USD strength. It has been widely expected that the authorities will keep the renminbi stable ahead of the Party Congress, but the movements were quite volatile, dictated by the USD as well as capital flows. Going forward, we expect USD/CNY to stabilise around the current level of However, USD/CNY will in our view edge lower towards 6.50 in the coming two years. FX reserves increased again in September, exceeding USD 3.1tn. 8
9 HKD: Continued strengthening after months of depreciation The HKD continued to wipe out some of the losses and is now trading close to parity at USD/HKD The spread in 12-month market rates between Hong Kong and the US continued to widen and we might see a continuation of that trend, as excess liquidity might prompt the Hibor to stay rather flat for longer. The 12-month forward points remain around the level close to the lower band of the peg USD/HKD 7.75, providing a cheap hedge against the HKD as well as indirectly the CNH, as the currency developments are highly correlated. We believe that the USD/HKD peg will be kept for now, but it might be restructured to include CNY in the basket later on. 9
10 India: Accelerating inflation and weak growth Indian inflation continues at levels below the target, but it has clearly accelerated from the levels seen during the summer. At the same time, economic growth seems to be slacking compared to previous years, which all in all will create a dilemma for the RBI. At its recent meeting, the RBI kept the policy rate unchanged citing the upward trend in inflation as the main concern. Moreover, it cut down the growth forecasts for the economy and decreased the Statutory Liquidity Ratio (SLR), making more funds available for lending. We continue to expect the RBI to cut its policy rate at the December meeting, provided that the INR does not come under depreciation pressure again. 10
11 INR: Temporary setback The INR has suffered notably in the most recent month, despite the foreign inflows into Indian assets remaining at previous robust levels. The renewed USD strength together with accelerating inflation and a slowdown in growth continue to weigh on the INR. However, we expect the INR to regain its footing in the coming years with an end target of USD/INR 62. Despite the temporary slowdown in the Indian economy, we consider the longterm potential to be intact due to ongoing reforms, which should continue to attract foreign investors to the country. We do not think the RBI s decision of whether to stay on hold or cut its policy rate further will have a significant impact on the currency going forward. 11
12 IDR: BI cuts rate further to provide stimulus The IDR continued to experience higher volatility recently. Following the appreciation in September, it recently weakened, clearly breaking out of the trading range that it was stuck in from mid-january to late summer. The BI cut its policy rate by 25bp once again in September, adding to the August cut. In the central bank s view, inflation should level off around the current levels, slightly below the 4.0% target also in 2018 and The cuts will also be supportive for growth, which still falls short of the potential. However, the BI expects the Q3 GDP to show some acceleration compared to the previous figure. We expect the IDR to remain stable, as the BI might intervene in case of strong 12 capital outflows, given the stronger dollar.
13 KRW: Calm before the storm? The situation on the Korean peninsula had been rather calm until North Korea recently reaffirmed its commitment to development of ICBM capable of reaching the US mainland. The KRW appreciated a bit last month, despite the renewed USD strength. Even though the consensus seems positive on the won, we keep up the red flag, as the North Korean provocations are unpredictable, so the situation might escalate quickly and hurt the won. The Bank of Korea kept the policy rate unchanged at its last meeting, while maintaining a hawkish tone. A rate hike seems not to be too far away. 13
14 MYR: Still a lot to catch up with Following a period in which the MYR has started to catch up with the basic indicators of fair value level, such as yield difference or oil price, the positive development was once again halted. The inflation rate should remain contained in the coming months, implying no policy changes at the BNM, further supporting the ongoing economic recovery. Growth is rebounding and markets expect it to exceed 5% this year. According to the Malaysian government, it should even accelerate in The USD/MYR has much more further downside potential, in our view. However, a robust MYR recovery might not come until 2018, as the strong USD will dominate Q4. 14
15 PHP: Not much brighter The inflation rate increased to 3.4% y/y in September and the uptrend might continue in Q4 due to rising oil and import prices given the weak peso. The BSP is expected to stay on hold for longer, unless peso depreciation or increasing inflation slips out of control. Growth in Q3 is likely to show improvement relative to Q2 with exports and strong domestic demand being the main drivers. Government spending on infrastructure is expected to rise sharply in the near future. Increasing public spending and imports are the main risks, especially as the Philippine current account balance continues worsening. The PHP will, in our view, continue depreciating against the USD. 15
16 SGD: MAS stays on hold The MAS stayed on hold at the October meeting in line with expectations. The inflation rate continues remains at low levels, while core inflation hovers around the mid-point of the MAS forecast. The advance estimate of Q2 GDP came out far ahead of expectations, recording 4.6%y/y growth mainly due to robust developments in the manufacturing sector. Despite the robust economic growth, demand still seems to slack and it will take a while before stronger demand-side inflationary pressure emerges. The SGD gave away some of its recent gains and might continue weakening due to USD strength in Q4. However, in the medium-term it should strengthen on improving global momentum in trade. 16
17 THB: Inflation moving closer to the target The BoT left the interest rate unchanged at 1.50% at its recent meeting. However, in the press release it noted positive developments in the Thai economy, including broad-based economic growth and lack of deflationary risks. The inflation rate rose due to an increase in oil prices and an excise tax hike, thereby moving closer to the BoT s tolerance band. The value of the exchange rate will be monitored by the BoT, as sharp strenghtening of the THB against the largest trade partners would dampen export growth. However, in our view the USD/THB will continue the downtrend due to improving fundamentals. 17
18 TWD: Stable for the rest of this year Inflation remains rather modest, mostly driven by TWD appreciation suppressing import prices. That should let the central bank stay on hold for much longer. Labour market conditions and macro momentum remain robust. The export sector is set to improve further in the remaining part of the year on top of the already robust performance, as the tech sector should accelerate due to smartphone production on new releases. Equity inflows to Taiwanese assets remained robust, while the USD/TWD edged sharply down in mid-october. Markets expect the TWD to continue strengthening gradually against the USD, but the TWD should remain rather stable in the remaining part of the year. 18
19 VND: Narrow range trading The USD/VND continues to trade in a narrow range of and this stable trend will likely be maintained in the remaining part of the year. The government forecasts economic growth to reach 6.7% y/y, even though a large share of legislators remain worried about the feasibility of the target due to low growth in H1 as well as slow improvement in productivity and competitiveness. Q3 GDP growth reached 7.5%, implying a significant improvement from the previous quarters, as manufacturing activity was robust and agricultural production has rebounded after floods. Due to continued reforming efforts, FDI inflows should remain strong. 19
20 Update on Asia and selected Asian countries 3 Financial forecasts 20 Contacts & Disclaimer 23
21 Financial forecasts FX rates 21
22 Financial forecasts rates 22
23 Update on Asia and selected Asian countries 3 Financial forecasts 20 Contacts & Disclaimer 23
24 Nordea in Asia Corrado Lillelund Forcellati Antti Oksala Nordea Markets Singapore Branch Margnus Karlsson Jussi-Pekka Lyytinen Daniel Aagaard Pedersen Fredrik Fremberg Research in Asia Amy Yuan Zhuang, CFA (maternity leave) EM Research Anders Svendsen Tuuli Koivu Natalia Kornela Setlak Nordea Markets is the commercial name for Nordea s international capital markets operation. The information provided herein is intended for background information only and for the sole use of the intended recipient. The views and other information provided herein are the current views of Nordea Markets as of the date of this document and are subject to change without notice. This notice is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient. The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results. Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction. This document may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Markets.
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