DAILY FX OUTLOOK. Monday, February 19, FX Themes/Strategy/Trading Ideas The week ahead

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1 DAILY FX OUTLOOK FX Themes/Strategy/Trading Ideas The week ahead Monday, February 19, 2018 Treasury Research & Strategy Emmanuel Ng The dollar climbed across the board on Friday and ended higher on the day but still capped off a week of losses across G10 space. Elsewhere, risk appetite levels improved further as global equities stabilized, resulting in the FXSI (FX Sentiment Index) slipping back into Risk-Neutral territory from the Risk-Off zone. This week, apart from the global data calendar, the Fed-speak calendar picks up from mid-week with the FOMC minutes also due on Wednesday. On Friday, look to the Fed s semi-annual monetary policy report to Congress, with the new Fed chair Powell delivering the testimony. On the ECB front, ECB meeting minutes are due on Thursday while the ECB s Coeure speaks on Friday. Elsewhere, the BOE s Carney speaks today (1745 GMT), while other appearances this week include a joint panel of BOE officials testify before the Treasury Committee on the Inflation Report on Wednesday. Closer to home, the RBA s Bullock speak at 2215 GMT on Monday while RBA meeting minutes are also due on Tuesday at 0030 GMT. Overall, with risk appetite levels having somewhat normalized, the dollar may once again be potentially buffeted by perceived central bank policy dynamics this week. In our view, the de facto tendency may remain one of dollar vulnerability pending the FOMC minutes and Powell. In the interim, the conundrums surrounding correlation breaks may continue to lag investors. While global long-end yields have generally inched higher in in the past week, the broad dollar has continued to remain under water despite aggregate rate differentials moving in favor of the greenback. For today, expect a relatively quieter start to the week with NY, Shanghai, and Mumbai away for the long weekend, with Toronto, HK, and Taipei also closed today. CFTC data meanwhile showed large non-commercial, leveraged, as well as asset manager accounts, pared their net implied short dollar balance in aggregate in the latest week. Expect positioning to have readjusted as the broad dollar ran counter to these expectations and slipped further in subsequent sessions. Our 12 Feb 18 idea to be tactically short AUD-USD (spot ref:0.7829) was stopped out on 14 Feb 18 at for an implied -1.09% loss.

2 03/03/ /07/ /11/ /03/ /07/ /11/ /03/ /07/ /11/ /03/ /07/ /11/2017 Barring excessive negativity surround Brexit-related headlines, a market fixated with broad USD vulnerability and ongoing hawkish BOE expectations may permit the GBP-USD to search higher beyond the short term. As such, we undertake a structural long GBP-USD (spot ref: ) on 15 Feb 18, targeting and place a stop at Asian FX EPFR data saw implied net portfolio equity inflows into Asia (ex Japan, China) moderating significantly in the latest week while net implied bond outflows deepened in the same period. Asian net portfolio inflow data meanwhile remain less than encouraging, although we are witnessing some semblance of a recovery of inflows for the KRW while net inflows for the INR still remain relatively resilient. On the flip side, expect the IDR and PHP to remain relatively more vulnerable on the back of net outflows. Overall, the ACI (Asian Currency Index) may consolidate intra-day after slipping slightly at the end of last week, and any further Asian FX resilience may have to be predicated on a resumption of healthier net inflows. Bank Indonesia kept its benchmark rate unchanged at 4.25% as expected on Thursday with little hint of hawkishness (policy support remains the central theme) with the central bank also noting that, Bank Indonesia will remain vigilant of emerging global financial market uncertainty, while continuing exchange rate stabilisation measures to safeguard the currency's fundamental value and maintain market mechanisms. SGD NEER: The SGD NEER is on slightly firmer ground at around +0.35% above its perceived parity (1.3149). NEER-implied USD-SGD thresholds are a touch softer from late last week while the basket may continue to range within +0.20% (1.3123) and +0.40% (1.3097) ahead of the budget speech later today Asian Currency Index SGD NEER % deviation USD-SGD Current % Parity % CFETS RMB Index: Public holiday. Treasury & Strategy Research 2

3 CFETS NEER vs. USD-CNY mid-point /1/10 1/1/11 1/1/12 1/1/13 1/1/14 1/1/15 1/1/16 1/1/17 1/1/18 CFETS RMB Index USD-CNY Fix, Bloomberg Treasury & Strategy Research 3

4 18-Feb Jun Aug Dec Feb Jun Aug Dec Feb Feb Jun Aug Dec Feb Jun Aug Dec Feb Feb Jun Aug Dec Feb Jun Aug Dec Feb Feb Jun Aug Dec Feb Jun Aug Dec Feb-18 G EUR-USD EUR-USD The EUR-USD remains detached from its (significantly softer) short term implied valuations but more range trading within may persist ahead of the expected Fed-ECB headline risks later this week Actual Fitted USD-JPY USD-JPY The nomination of Kuroda and 2 deputies (Amamiya and Wakatabe) to the BOJ is not expected to incite undue yen bullishness, with central bank jawboning against FX volatility heating up in. Nonetheless, we expect any inherent USD vulnerability to continue to be expressed via the USD-JPY in the near term. Expect the support at 10 to remain fragile. Actual Fitted AUD-USD AUD-USD With short term implied valuations looking range bound, expect price action for the AUD-USD to follow suit pending further policy cues from the RBA this week. As such, the neighborhood may continue to anchor Actual Fitted GBP-USD GBP-USD Short term implied valuations for the GBP-USD have attempted to plateau in recent sessions and the pair may continue to orbit the handle in the interim. Note however that investors continue to impute incipient hawkish expectations to the BOE ahead of the data prints this week Actual Fitted Treasury & Strategy Research 4

5 18-Feb Jun Aug Dec Feb Jun Aug Dec Feb USD-CAD USD-CAD In line with the other majors, USD- CAD may also attempt to hug the region with its short term implied valuations attempting to stabilize in recent sessions and despite the recent bottoming of the commodity complex. Look for the 55-day MA (1.2570) to shelter while may support on initial dips. Actual Fitted Treasury & Strategy Research 5

6 USD-Asia VS. Net Capital Flows South Korea Taiwan NFB: Bond & Eq 20D RS USD-KRW NFB: 20d RS USD-TWD India Indonesia NFB: Bond & Eq RS 20D USD-INR Bond & Equity: 20D RS USD-IDR Philippines Thailand NFB: RS20 USD-PHP Net bond & equity WTD RS20 USD-THB Malaysia Equity 20D RS USD-MYR Treasury & Strategy Research 6

7 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Aug-16 Dec-16 Aug-17 Dec Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep z-score 4wk MA ACI VS. Net Capital Flows Stronger Asia FX Weaker Asia FX 1m% FX Sentiment Index RISK OFF RISK ON -2.0 Total Net Flows (20D RS) ACI (RHS) 1M Correlation Matrix Security DXY USGG10 CNY SPXMSELCA CRY JPY CL1 VIX ITRXEX CNH EUR DXY THB SGD CHF MYR TWD CNH JPY CAD CNY INR KRW CCN12M IDR USGG PHP AUD NZD GBP EUR Source: Bloomberg Technical support and resistance levels S2 S1 Current R1 R2 EUR-USD GBP-USD AUD-USD NZD-USD USD-CAD USD-JPY USD-SGD EUR-SGD JPY-SGD GBP-SGD AUD-SGD Gold Silver Crude G10 FX Heat Map AUD NZD EUR GBP JPY CAD USD SGD MYR AUD NZD EUR GBP JPY CAD USD SGD MYR Asia FX Heat Map USD JPY CNY SGD MYR KRW TWD THB PHP INR IDR USD JPY CNY SGD MYR KRW TWD THB PHP INR IDR Treasury & Strategy Research 7

8 Government bond yield changes US 1.00 Eurozone Japan UK Australia Canada M 12M 2Y 3Y 5Y 7Y 10Y China Korea Taiwan M 12M 3Y 5Y 10Y M 6M 12M 2Y 3Y 5Y 10Y 2Y 5Y 10Y 1 India Indonesia 1 Singapore M 6M 12M 2Y 3Y 5Y 10Y - 1Y 2Y 3Y 5Y 7Y 10Y 3M 6M 12M 2Y 5Y 10Y Thailand Malaysia 4 2 Philippines M 6M 12M 2Y 3Y 5Y 10Y M 7M 12M 2Y 3Y 5Y 7Y 10Y -8 Treasury & Strategy Research 8

9 FX Trade Ideas Inception B/S Currency Spot Target Stop/Trailing Stop Rationale TACTICAL 1 09-Feb-18 B USD-CAD Softer crude and fragile appetite towards the cyclicals STRUCTURAL B EUR-USD ECB likely to alter its forward guidance into the spring S USD-JPY Market fixation on USD weakness, despite mitigating factors and the BOJ 4 15-Feb-18 B GBP-USD Borad dollar vulerability coupled with hawkish BOE expectations. RECENTLY CLOSED TRADE IDEAS Inception Close B/S Currency Spot Close Rationale P/L (%)* 1 27-Nov B GBP-USD Investors may imputebrexit talks in December. Prevailing USD weakness Feb-18 S USD-SGD Heay dollar, positive risk appetite, SGD NEER not excessively strong Feb-18 B EUR-USD "Hawkish" ECB expectations, positive German poloitical news flow 4 12-Feb Feb-18 S AUD-USD Unstable equity/risk appetite environment. Less than hawkish RBA **of notional Treasury & Strategy Research 9

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