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USD strength hits a roadblock 3 February 2017 Mid-quarter FX update USD strength hits a roadblock DBS Group Research 3 February 2017 Asia Fundamentals favor USD as the strongest G3 currency But Trump’s protectionist language is holding it back USD may correct further before appreciating again CNY Moving with DXY HKD Monitoring liquidity TWD Upside surprise KRW Downgraded SGD Neutral policy remains MYR Vigilant against speculation THB Broad-based recovery IDR Rating upgrade looms PHP Debt rating warning VNDStable INRResilient USD Fed hikes vs protectionism JPY Hopeful EUR QE stays GBP Article 50 looms AUD Slow and patient Profit-taking in the USD in early 2017 after strong Trump rally in Nov-Dec 2016 6 MAJOR CURRENCIES 5.2 5 BRICS EMERGING ASIAN CURRENCIES 5.0 4.1 4.1 4 3.3 3 3.0 2.6 2.4 2.3 2 3.6 2.4 2.0 0.9 1 2.1 1.3 0.7 0.8 0.7 -3 -0.3 PHP -2 0.0 HKD 0 -1 % change vs USD, * USD is performance of DXY index 1 Feb 2017 vs 31 Dec 2016 -2.5 VND IDR MYR THB SGD TWD KRW INR CNY ZAR RUB BRL USD EUR GBP CAD JPY NZD AUD -4 Philip Wee • (65) 6878-4033 • [email protected] Refer to important disclosures at the end of this report 1 USD strength hits a roadblock 3 February 2017 Currency forecasts EUR /usd usd/ JPY usd/ CNY usd/ HKD usd/ TWD usd/ KRW usd/ SGD usd/ MYR usd/ THB usd/ IDR usd/ PHP usd/ INR usd/ VND AUD /usd GBP /usd 1-Feb 1Q17 2Q17 3Q17 4Q17 1.0758 1.08 1.08 1.07 1.07 Consensus Forwards 1.04 1.08 1.03 1.08 1.05 1.09 1.05 1.10 113.23 111 113 114 116 Consensus Forwards 115 113 118 112 118 112 117 111 6.8706 6.93 7.02 7.11 7.19 Consensus NDF 7.00 6.91 7.09 6.99 7.13 7.05 7.16 7.11 7.7597 7.78 7.78 7.78 7.78 Consensus Forwards 7.76 7.75 7.76 7.75 7.76 7.75 7.76 7.75 31.079 32.2 32.4 32.5 32.7 Consensus NDF 32.5 31.1 32.8 31.0 32.9 30.9 33.0 30.8 1143 1199 1201 1204 1206 Consensus NDF 1200 1153 1211 1152 1220 1150 1220 1148 1.4108 1.44 1.45 1.46 1.48 Consensus Forwards 1.45 1.41 1.47 1.41 1.47 1.41 1.47 1.41 4.4220 4.46 4.56 4.67 4.78 Consensus NDF 4.50 4.43 4.55 4.45 4.52 4.48 4.54 4.50 35.049 36.3 36.5 36.6 36.8 Consensus Off fwd 36.0 35.1 36.2 35.1 36.3 35.1 36.4 35.2 13350 13339 13518 13697 13876 Consensus NDF 13600 13466 13740 13640 13800 13816 13826 14022 49.759 49.8 50.2 50.7 51.1 Consensus NDF 50.2 49.6 50.6 50.1 50.8 50.4 50.5 50.6 67.370 69.6 70.5 71.4 72.4 Consensus NDF 68.5 67.7 68.9 68.5 69.0 69.2 69.0 69.9 22640 22782 22782 22782 22782 Consensus Forwards 22882 22720 23000 22856 23000 23004 23200 23185 0.7655 0.71 0.70 0.70 0.69 Consensus Forwards 0.73 0.76 0.72 0.76 0.72 0.75 0.72 0.75 1.2520 1.23 1.20 1.17 1.14 Consensus Forwards 1.21 1.27 1.21 1.27 1.22 1.27 1.23 1.28 DBS forecasts in red. Consensus and forwards from Bloomberg as at 1 Feb 2017 2 USD strength hits a roadblock 3 February 2017 Fed believes it is time to start normalizing rates Fed's rate hike cycle is gradual vs past experiences % YoY 6 5 Fed's 2-2.5% inflation target 4 Ave hourly earnings 3 2 1 CPI inflation Core CPI 0 -1 -2 -3 07 08 09 10 11 12 13 14 15 16 17 Jan-07 Fed Funds Rate, % pa Feb-07 7 Mar-07 1999-00 Apr-07 6 May-071994-95 2004-06 Jun-07 Jul-07 5 Aug-07 Sep-07 4 Oct-07 Nov-07 3 Dec-07 Jan-08 2 Feb-08 Mar-08 1 Apr-08 2015-19 X-axis: number of months from 1st hike May-08 0 Jun-08 0 12 24 36 48 Jul-08 7 6 5 4 3 2 1 0 Fed hike expectations vs Trump protectionism fears Our view has not changed. We consider the USD’s depreciation since the start of 2017 a correction from the (perhaps overly-strong) Trump rally in Nov-Dec 2016. The USD will eventually resume its appreciation when the Fed steps up th epace of rate hikes this year. Previously it hiked once in in 2015 and once in 2016. The Fed’s dot plot continues to paint a monetary policy normalization process that extends into 2019. We expect four Fed hikes this year. Officials signalled three rate increases for 2017 at the FOMC meeting in Dec 2016. It also kept the door open for more hikes if President Donald Trump delivers on his pledge to boost the US economy with tax cuts, more fiscal spending and deregulation. Close attention will be paid to Trump’s budget proposals scheduled for 6 Feb. The Fed reckons that for every increase in fiscal spending by 1% of GDP, rates can rise by an additional 50bps. The importance of Fed hikes to the USD’s outlook is best reflected by the high correlations that EUR/USD and USD/JPY have with their respective 10Y bond yield spreads against their US counterpart. Lower EUR/USD needs more Fed hikes, steady ECB Higher USD/JPY Latest needs more Fed hikes, steady BOJ % pa % pa ↑ stronger EUR -1.40 US presidential election -1.50 Trump's inauguration -1.60 -1.70 -1.80 -1.90 -2.00 EU-US 10Y bond spread EUR/USD (right) (left) -2.10 Trump's inauguration 120 1-Jun-16 2-Jun-16 3-Jun-16 USD/JPY 2.20 6-Jun-16 (right) 2.10 7-Jun-16 8-Jun-16 2.00 9-Jun-16 1.90 10-Jun-16 1.80 13-Jun-16 US-JP 10Y 14-Jun-16 bond spread 1.70 (left) 15-Jun-16 1.60 16-Jun-16 1.50 17-Jun-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 20-Jun-16 115 1.14 2.60 1.13 2.50 1.12 2.40 1.11 2.30 1.10 1.09 1.08 1.07 1.06 -2.20 1.05 -2.30 1.04 -2.40 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 1.03 ↑ stronger USD US presidential election 110 105 100 95 3 USD strength hits a roadblock 3 February 2017 EU stocks came up from behind US equities Indexed: 8 Nov 2016=100 Nikkei 225 Latest rise and fell with USD/JPY ↑ stronger EUR 1.14 110 Indexed: 8 Nov 2016=100 (left) 1.12 106 1.10 104 S&P500 1.08 (left) 102 EUR/USD 100 1.06 (right) 1.04 98 Trump's inauguration US presidential election 96 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 1.02 120 (left) MSCI Euro 108 ↑ stronger USD Nikkei 225 115 110 1-Jun-16 2-Jun-16 USD/JPY 3-Jun-16 (right) 105 6-Jun-16 7-Jun-16 8-Jun-16 S&P500 100 9-Jun-16 (left) 10-Jun-16 13-Jun-16 95 14-Jun-16 15-Jun-16 US presidential Trump's 16-Jun-16 election inauguration 90 17-Jun-16 Sep-1620-Jun-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 115 110 105 100 95 Even so, two hurdles have emerged to challenge USD bulls in early 2017. First, the global recovery turned out to be broader-than-expected. As the growth/inflation outlook improved in Europe and Japan, their equity markets started to play catch up with the US. EUR/USD regained its composure and recovered when EU equities overtook their US peers on an indexed basis. Japanese stocks, on the other hand, are still linked to Abenomics and needed a weaker JPY to keep rising. While encouraged by the better outlook, central banks in the Eurozone and Japan did not to abandon their loose monetary policy stance. Second, while fundamentals favored the greenback on a relative basis, USD bulls ran up against a wall of trade protectionism from the Trump administration. Soon after his inauguration, Trump cancelled the TransPacific Partnership (TPP) in Asia, sought to renegotiate the North American Free Trade Agreement (NAFTA) and was last looking to scrap the Transatlantic Trade and Investment Partnership (TTIP) with Europe. Trump cheered Brexit which reflected his administration’s preference for bilateral trade deals that favor the US. Key events in 1H 2017 Date Event Feb 6 Feb 12 Feb 15 President Trump presents budget proposals German presidential election Fed Chair Yellen's congressional testimonies Fed hikes vs Trump's protectionism DXY Index 104 103 Fed hike 102 Trump's inauguration 101 Mar 15 Mar 15 Mar 31 FOMC meeting Netherlands general election Article 50 & Brexit Apr mid Apr 23 US Treasury Department Currency Report French presidential elections 98 May 26 G7 Summit 96 Jun 11 Jun 14 French legislative elections FOMC meeting 100 99 Trump wins US elections 97 95 94 Sep-16 Cancelled TTP & TTIP Renegotiate NAFTA Mexico wall FX manipulation: CNY, JPY, EUR USD excessively strong Fed signals Dec hike Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 4 USD strength hits a roadblock 3 February 2017 America's top 10 bilateral trade deficits Current account balances Jan-Nov16 total, USD bn Actual & projected 2016 balances, % of GDP 350 IE: Ireland DE: Germany CN: China 300 8 JP: Japan MX: Mexico KR: S Korea 3% of GDP criteria to qualify as a currency manipulator GE: Germany 250 6 JP: Japan IT: Italy CN: China IE: Ireland VN: Vietnam 200 MY: Malaysia 4 VN: Vietnam KR: S Korea IT: Italy 150 IN: India 2 IN: India USD 20bn criteria to qualify as currency manipulator 100 Legend 10 Legend MY: Malaysia MX: Mexico 0 -2 50 -4 0 CN JP GE MX IE VN KR IT IN MY IE DE KR JP IT CN MY VN IN MX The risk of America labelling more countries, not just China, as currency manipulators is no longer negligible. The Trump administration criticized China, Japan and Germany for unfair trade advantages via weaker exchange rates from their loose monetary policies. US relations with Mexico have also deteriorated over the wall that Trump has pledged to build at the border. These four countries have one thing in common – America’s top four bilateral trade deficits are with them. Hence, the Trump administration is unlikely to tolerate a stronger USD ahead of the US Treasury Department Currency Report scheduled for midApril. Japanese corporates see US’s protectionist stance limiting USD/JPY’s upside to 120-125. Eurozone is, meanwhile, vigilant against key elections in the Netherlands, France and Germany leading to more Euroscepticism. The last thing the EU needed was Trump’s complaint against the EUR’s undervaluation adding to break-up risks. With its key components (EUR and JPY) reluctant to depreciate sharply, it will be hard for the DXY to rally strongly. Given its tightened relationship with the DXY, USD/CNY is unlikely to rise above 7.00 anytime soon either. Real effective exchange rate of EUR USD/CNY tightened its correlation with DXY Index Base year 2010=100 DXY (USD) Index 120 104 103 102 101 100 99 98 97 96 95 94 93 92 91 90 Jan-16 +2 std dev 115 110 +1 std dev 105 Ave 100 95 90 -1 std dev 85 80 REER EUR -2 std dev REER is from Bank of International Settlements 94 95 96 98 99 00 02 03 04 06 07 08 10 11 12 14 15 16 USD/CNY 7.00 6.95 6.90 6.85 6.80 6.75 1 1 1 1 1 1 1 2 2 6.70 6.65 6.60 6.55 6.50 6.45 Apr-16 Jul-16 Oct-16 Jan-17 5 USD strength hits a roadblock 3 February 2017 Asia ex Japan currencies since US presidential election USD vs AXJ currencies since US presidential elections Y-axis: sensitivity to DXY Index % ch in USD vs AXJ, 2 Feb 2017 vs 8 Nov 2016 7 1.25 ↑ stronger USD 6 1.00 5 KRW MYR 0.75 4 SGD 3 THB 0.50 0.25 2 TWD CNY VND PHP 1 IDR 0 INR 0.00 0.25 X-axis: std dev 0.50 0.75 1.00 1.25 1.50 -1 -2 DXY EUR JPY GBP AUD CNY TWD KRW SGD MYR MYR PHP THB IDR DXY CNY SGD VND INR KRW THB TWD AXJ currencies after the US presidential elections Overall, Asia ex Japan (AXJ) currencies weathered the post-US election headwinds from the global USD fairly well. The DXY Index is our reference for the global USD below. Currencies of high growth economies – PHP, IDR, VND and INR – were notably resilient when DXY rallied strongly in Nov-Dec 2016. They were, however, less willing to appreciate when DXY retreated in early 2017. These are pro-investment Asian countries that promote policies to enhance the attractiveness of their domestic-led economies. Indonesia is a good example where we expect a debt rating upgrade. The one exception is the Philippines where risks to its debt rating have surfaced. KRW and MYR were the most volatile AXJ currencies with performances matching the DXY. Both KRW and MYR fell most in the region when DXY was strong, and recovered very differently when DXY was weak. The KRW recouped most of its losses while the MYR held on to most of them. While Malaysia has been vigilant against speculation against its currency, Korea is worried that America may name it a currency manipulator. TWD and the THB stood out as the only currencies that appreciated back to pre-election levels. Taiwan was the only Asian country that experienced a recession, and is currently benefitting from the cyclical global export recovery. Thailand is also expecting a broad-based recovery. Both countries have strong international liquidity positions. Sources: All data are sourced from CEIC, Bloomberg, Reuters and government agencies. Transformations and forecasts are from DBS Group Research and Bloomberg consensus Even so, there is little room for complacency. Financial markets have been fairly sanguine about the Trump between his election victory and his inauguration, keeping focus on his policies to stimulate the US economy. The rotation out of bonds into equities reflected optimism in America emerging from its crisis, and the Fed moving towards normalize monetary policy in a meaningful way. This optimism is predicated on the market’s assumption that Trump’s protectionist ways would only increase trade tensions and not lead to trade wars. Unfortunately, markets have not drawn comfort from the cancellation of trade pacts and accusations of currency manipulations after Trump’s inauguration. Markets are no longer sure if Trump would not name China a currency manipulator and spark a trade war. 6 USD strength hits a roadblock 3 February 2017 US dollar USD’s uptrend is still intact, underpinned by expectations of Fed hikes and fiscal stimulus • The DXY (USD) Index broke above its two-year range between 93 and 100 during the Trump rally in Nov-Dec 2016. The subsequent fall from its high of 103 to below 100 in early 2017 was triggered by protectionism worries after his inauguration. DXY (USD) Index – flatter climb 110 105 DBSf Consensus CNY deval ECB QE 100 • Yet, this is still considered a correction in the USD’s medium-term uptrend. While growth and inflation also improved in the Eurozone, UK and Japan, their central banks have resisted calls to roll back their loose monetary policies. None of them intend to join the Fed in hiking rates this year. 95 • The USD’s continued rally hinges strongly on the Fed moving from “one hike a year” in 2015-16 to more hikes in 2017. The Fed’s projection for three hikes this year did not factor in Trump’s policies. The Fed reckoned that if fiscal spending increased by 1% of GDP, rates could rise by another 50bps. US President Donald Trump is scheduled to present his budget proposals on the first Monday of Feb. 80 • There is one main risk to this outlook. Trump’s protectionist policies must not escalate trade tensions into trade wars. 110 Fed hikes 105 100 Projected trading range 95 Trump victory 90 Brexit BOJ QQE2 BOJ QQE1 85 90 85 80 Fed 75 75 12 13 DBS Consensus 14 15 16 17 1-Feb 1Q17 2Q17 3Q17 4Q17 99.64 98.9 100.2 99.4 103.1 99.8 103.9 100.2 102.8 Projected trading band Ceiling 103.75 103.8 104.2 104.6 Floor 94.147 94.1 94.6 95.0 Slope 1.7% depreciation a year for USD Width 5.1% around mid 105.0 95.4 Japanese yen USD/JPY has retreated from the top of our projected trading band after a strong rally in Nov-Dec • Japan was a major beneficiary of the Trump rally in Nov-Dec 2016. USD/JPY surged 17.3% within a short span of six weeks, from its 101.15 low on 9 Nov to a high of 118.66 on 15 Dec. The weak JPY propelled the Nikkei 225 higher by more than 20% during the comparable period. • The 10Y Japanese Government Bond (JGB) yield turned positive from mid-Nov after staying below 0% for 8-9 months. While many attributed this to the Trump rally lifting global bond yields, note that Japan’s headline inflation has also returned to positive territory since Oct16. • This, however, does not imply that the Bank of Japan (BOJ) is about to declare victory on achieving its goal to return inflation to 2%. Core inflation, which excludes food and energy, has remained subdued at 0-0.2% since Aug16. According to a Reuters polls in January, nearly two-thirds of Japan’s corporates do not intend to raise wages this year. • Finally, Japan Inc believes that USD/JPY’s upside will be limited to 120-125 after US President Donald Trump threatened to slap tariffs on Toyota cars built in Mexico. USD/JPY – correcting from top of rising channel 130 CNY deval ECB QE Fed hikes DBSf Consensus 130 125 120 120 115 BOJ QQE2 110 110 Fed taper 100 105 Brexit Trump victory BOJ QQE1 90 100 95 90 85 80 80 Projected trading range 75 70 70 12 DBS Consensus 13 14 15 16 17 1-Feb 1Q17 2Q17 3Q17 4Q17 113.23 111 115 113 118 114 118 116 117 Projected trading band Ceiling 118.69 118 120 121 Floor 102.31 103 105 106 Slope 5.0% depreciation a year for JPY Width 7.8% around mid 122 107 7 USD strength hits a roadblock 3 February 2017 Euro EUR/USD to eventually reflect a better US outlook vs the Eurozone • EUR/USD is expected to eventually trade below its two-year range between 1.05 and 1.15. We expect the Fed to deliver four rate hikes this year, which will be a significant departure from its “one hike per year” pace seen in 2015 and 2016. The European Central Bank (ECB), on the other hand, will keep its quantitative easing (QE) program running till the end of 2017. • EUR/USD recovered some of its post-Trump losses in January as the growth/inflation outlook in the Eurozone also improved. Germany, where inflation is higher than the bloc, has started to call on the European Central Bank (ECB) to roll back on its loose monetary policy. • The ECB is unlikely to deviate from its plan to keep its quantitative easing (QE) program running till end-2017. It has dismissed the recent rise in headline inflation as supply-led, driven mostly by oil prices. Underlying core inflation has remained subdued at/below 1% YoY since 4Q13. On the economy, the ECB remains vigilant against political risks, from Brexit to the elections in Europe this year, as well as protectionist policies coming out of the US. EUR/USD – wide range with gradual downside bias Fed taper 1.40 1.40 1.35 1.35 1.30 BOJ QQE1 1.25 1.30 BOJ QQE2 1.25 1.20 DBSf Consensus Brexit 1.15 1.20 1.15 Projected trading range Trump victory 1.10 1.10 1.05 1.05 ECB QE 1.00 12 13 DBS Consensus 14 CNY deval 15 Fed hike 16 1.00 17 1-Feb 1Q17 2Q17 3Q17 4Q17 1.0767 1.08 1.04 1.08 1.03 1.07 1.05 1.07 1.05 Projected trading band Ceiling 1.1401 1.14 1.14 1.13 Floor 1.0205 1.02 1.02 1.01 Slope -1.3% depreciation a year for EUR Width 5.9% around mid 1.13 1.01 British pound GBP/USD remains a “buy the rumour, sell the fact” on the UK eventually triggering Article 50 • GBP/USD has been stable within 1.20-1.28 after the flash crash on 7 Oct. The underlying bearish bias for GBP is, however, intact and subtly reflected by the “lower highs” and “lower lows” of the range. • The ups and downs within this boundary echoed the market’s hopes for UK to avoid leaving the European Union (EU) and its fears for a hard Brexit. The swings also reflected the struggle to balance the upside surprises in post-referendum UK data and the potential medium-term drag on the economy from corporates and banks leaving the UK. GBP/USD – bumpy road towards Article 50 1.80 1.80 1.70 Fed taper BOJ QQE2 1.60 1.70 CNY deval Fed hike 1.60 Brexit 1.50 ECB QE BOJ QQE1 1.40 Fed DBSf Consensus 1.30 1.50 1.40 1.30 Projected trading range 1.20 1.20 Trump victory • The UK Supreme Court’s ruling on 24 Jan for parliament to vote on Article 50 is not expected to prevent Brexit from happening. Parliament could, however, table amendments and push out PM May’s deadline to trigger Article 50 by end-March. 1.10 • As with many major currencies, Brexit may be a “buy the rumour, sell the fact” play for GBP. The market is likely to resume selling GBP when it sees the UK government moving closer towards triggering Article 50. Once invoked, GBP/USD is likely to follow-through with another sell-off before it starts to stabilize and consolidate into a range. DBS Consensus 1.10 1.00 1.00 13 14 15 16 17 1-Feb 1Q17 2Q17 3Q17 4Q17 1.2652 1.23 1.21 1.20 1.21 1.17 1.22 1.14 1.23 Projected trading band Ceiling 1.3301 1.31 1.28 1.25 Floor 1.1571 1.14 1.11 1.08 Slope -9.0% depreciation a year for GBP Width 7.9% around mid 1.22 1.05 8 USD strength hits a roadblock 3 February 2017 Chinese yuan USD/CNY has been fluctuating with the global USD since Aug 2016 • USD/CNY peaked at 6.9628 on 3 Jan, which was its highest close since May 2008, before it corrected to the mid-point of our projected trading range. • To counter CNY depreciation pressures from outflows at the start of the year, China restricted cross border lending and transfer of funds by banks and corporates, limited the size and nature of foreign direct investment by Chinese companies and restricted the usage of USD by Chinese individuals. USD/CNY – projected trading band intact 7.20 7.20 Projected trading range 7.10 7.10 7.00 7.00 Trump victory 6.90 6.80 6.90 6.80 Brexit DBSf Consensus 6.70 6.70 6.60 6.60 CNY deval 6.50 6.50 Fed hike 6.40 • Apart from the above measures to discourage CNY depreciation, the fall in USD/CNY was also in line with the retreat in the DXY (USD) Index in January. In fact, USD/CNY has been highly correlated with the DXY since Aug 2016. Hence, USD/CNY is still likely to trend higher with the global USD on the Fed hikes coming this year. 6.30 • As for US President Donald Trump’s threat to label China a currency manipulator, this is unlikely to materialize in the next US Treasury Department (USTD) currency report scheduled for mid-April. China currently fulfills only one of the three measures on manipulation. The USTD will need to amend the criteria before it can label China. DBS Consensus BOJ QQE1 6.20 6.30 ECB QE 6.20 BOJ QQE2 6.10 6.10 Fed taper 6.00 13 6.40 6.00 14 15 16 17 26-Jan 1Q17 2Q17 3Q17 4Q17 6.8807 6.93 7.00 7.02 7.10 7.11 7.13 7.19 7.15 Projected trading band Ceiling 6.9933 7.06 7.15 7.23 Floor 6.7350 6.80 6.89 6.98 Slope 5.1% depreciation a year for CNY Width 1.9% around mid 7.32 7.07 Hong Kong dollar USD/HKD may lift off the floor of its 7.75-7.85 band on more than one US rate hike this year • The year 2017 started with the same scare over the weak CNY the same month a year ago. The overnight CNH Hibor spiked to 60% and revisited the highs seen in Jan 2016. China was also reining in the CNY’s depreciation then. • The panic was, however, considerably less compared to last year. USD/HKD did not spike above the mid-point of its 7.75-7.85 convertibility band. USD/CNH also traded at a discount and not a premium to USD/CNY. • Nonetheless, the weak CNY outlook has shrunk the CNY deposits in Hong Kong by CNY 304bn to CNY 547bn in 2016. This was twice the CNY 152bn fall seen in 2015. • The Hong Kong Monetary Authority (HKMA) has singled liquidity as its top worry in 2017. Expectation for the Fed to step up the pace of rate hikes this year could result in a more volatile investment environment. HKMA has already warned the government to expect lesser returns from the Exchange Fund. Hence, the scope for USD/HKD to deviate from the floor of its convertibility can no longer be discounted. USD/HKD – off the low of its convertibility band 7.90 7.90 Projected trading range 7.85 7.85 US loses AAA DBSf Consensus 7.80 ECB QE 7.75 BOJ QQE1 CNY deval 7.80 Brexit Fed taper BOJ QQE2 Fed hike Trump 14 15 16 17 7.70 7.75 7.70 11 DBS Consensus 12 13 1-Feb 1Q17 2Q17 3Q17 4Q17 7.7596 7.78 7.76 7.78 7.76 7.78 7.76 7.78 7.76 Projected trading band Ceiling 7.8000 7.80 7.80 7.80 Floor 7.7500 7.75 7.75 7.75 Slope 0.0% depreciation a year for HKD Width 0.3% around mid 7.80 7.75 9 USD strength hits a roadblock 3 February 2017 Taiwan dollar Taiwan’s improving cyclical fundamentals are keeping USD/TWD in the lower half of its rising price channel • USD/TWD was the only non-pegged Asia ex Japan exchange rate that stayed mostly within the lowest quartile of its ascending price channel during the Nov-Dec Trump rally. This was attributed to an export-led turnaround in the economy in 2H16. • Expectations for the central bank (CBC) to lower rates have evaporated. Real GDP growth turned positive in 2Q16 after three consecutive quarters of negative growth. Since then, growth picked up to 2.58% YoY in 4Q16 on the back of robust exports. • That said, the CBC is unlikely to follow US rates higher either. Monetary policy will remain accommodative to augment the government’s stimulus to boost domestic demand. We expect GDP growth to improve to 2.1% in 2017 from 1.4% last year. USD/TWD – testing bottom of channel 35 35 Fed hike CNY deval 34 Projected trading range 33 DBSf Consensus 34 33 ECB QE 32 32 BOJ QQE1 31 Trump victory Brexit 30 30 BOJ QQE2 29 31 29 Fed taper 28 28 13 14 15 16 17 1-Feb 1Q17 2Q17 3Q17 4Q17 31.274 32.2 32.5 32.4 32.8 32.5 32.9 32.7 33.0 • Until then, the CBC is not too concerned about CPI inflation which has remained below 2% YoY since Apr16. We see inflation averaging 1% this year. DBS Consensus • Overall, USD/TWD will firm this year from Fed hikes (we see four increases this year) and rate inaction by the CBC, but the rise will be tempered by a broader recovery in the Taiwan economy. Projected trading band Ceiling 32.850 32.9 33.1 33.3 Floor 31.347 31.4 31.6 31.8 Slope 1.9% depreciation a year for TWD Width 2.4% around mid 33.4 31.9 Korean won Fed hike expectations to keep USD/KRW firm in the upper half of its ascending price channel • Korea is wary that a Fed hike in March may increase currency volatility. Since Sep 2016, when the Fed started to prepare global markets for a hike last Dec, the correlation between USD/KRW and the DXY (USD) Index has tightened considerably. • Korea is not expected to follow America in raising rates this year. The Bank of Korea (BOK), on 13 Jan, downgraded its 2017 growth outlook to 2.5% from the 2.8% it forecast in Oct 2016. The new forecast is further below the 3% potential growth rate it projected in 2015. • The BOK has abandoned its 2.5-3.5% target band for CPI inflation in favour of a 2% target from 2016 to 2018. The decision was probably attributed to the fact that CPI inflation has remained below 2% YoY since Nov12. We expect inflation to average 1.6% in 2017 from 1.3% last year. • Speculation has emerged for the US to name Korea a currency manipulator. The US Treasury Department will need to modify the criteria of its monitor list for this to happen. Korea currently fulfills only two out of the three criteria that would tag it a manipulator. USD/KRW – returned into upper half of channel Projected trading range 1250 1250 Fed hike 1200 1200 CNY deval BOJ QQE1 1150 1150 ECB QE 1100 Trump victory 1100 Brexit DBSf Consensus US loses AAA 1050 BOJ QQE2 Fed taper 1000 1050 1000 11 DBS Consensus 12 13 14 15 16 17 1-Feb 1Q17 2Q17 3Q17 4Q17 1153 1199 1200 1201 1211 1204 1220 1206 1220 Projected trading band Ceiling 1251 1253 1255 1258 Floor 1143 1145 1147 1149 Slope 0.8% depreciation a year for KRW Width 4.7% around mid 1260 1152 10 USD strength hits a roadblock 3 February 2017 Singapore dollar USD/SGD’s uptrend remains intact within our projected trading band • The SGD nominal effective exchange rate (NEER) policy shifted to a neutral stance in Apr 2016. The Monetary Authority of Singapore (MAS) is unlikely to return to a modest and gradual appreciation policy at its next policy review in Apr 2017. USD/SGD – correcting down after Trump rally 1.55 Projected trading range 1.55 1.50 Fed hike 1.50 1.45 • Looking back, the neutral policy lasted about 1.5 years to help the Singapore economy recover from the 1997/98 Asian currency crisis and the 2008/09 global financial crisis. The zero appreciation policy was in place for almost 3 years during/after the 2000/01 global tech recession. 1.40 • CPI inflation was 1.2% YoY, 1.5% and 3.2% when the appreciation policy returned in Jul 2000, Apr 2004 and Apr 2010 respectively. Although inflation turned positive at 0.2% YoY in Dec16 for the first time in two years, it is still below the official 0.51.5% target range for 2017. 1.25 • Real GDP growth was more than 8% YoY and double-digit expansions were seen in non-oil domestic exports when the neutral stance was abandoned. Retrenchments also came off their peaks. All these factors have yet to come together. ECB QE CNY deval 1.45 1.40 1.35 1.35 Brexit BOJ QQE2 1.30 Trump victory Neutral SGD DBSf Consensus 1.20 1.30 1.25 1.20 14 15 DBS Consensus 16 17 1-Feb 1Q17 2Q17 3Q17 4Q17 1.4123 1.44 1.45 1.45 1.47 1.46 1.47 1.48 1.47 Projected trading band Ceiling 1.4645 1.47 1.48 1.50 Floor 1.3960 1.40 1.42 1.43 Slope 3.4% depreciation a year for SGD Width 2.4% around mid 1.51 1.44 Malaysian ringgit USD/MYR at record high again, with global USD remaining strong on Fed hike hopes • USD/MYR started 2017 on a high note. The peak of 4.4980 on 4 Jan surpassed the 4.4770 level seen during the emerging market volatility in Sep 2015. This, however, did not imply that the MYR was weak on domestic fundamentals. Unlike 2014-15, the Kuala Lumpur Composite Index (KLCI) is not falling sharply today from a slowing economy. USD/MYR – near record high again 5.00 DBSf Consensus 4.80 Fed hike 4.60 4.40 4.20 4.20 4.00 • In fact, we expect Malaysia’s growth to improve to 4.5% in 2017 from 4.2% in 2016 after two years of slowdown. The better outlook is reflected more in the KLCI than the MYR. Like Nov-Dec 2016, Trump’s stimulus plans and Fed hikes are expected to keep the USD strong globally this year. 3.80 • Against this bullish USD backdrop, Bank Negara Malaysia (BNM) will be vigilant against currency speculation this year. According to the Foreign Exchange Administration (FEA) rules, any offshore trading of MYR such as the non-deliverable forward (NDF) is not recognized. One thing needs to be clear. BNM is not targeting an exchange rate level but simply looking to prevent excessive volatility from hurting the recovery. It has assured real investors that liquidity will stay ample in the financial system. 2.80 3.60 4.80 4.60 Projected trading range 4.40 5.00 Trump victory Brexit Fed taper BOJ QQE1 3.40 ECB QE 3.20 3.80 3.60 CNY deval 3.40 4.00 3.20 BOJ QQE2 3.00 3.00 2.80 13 DBS Consensus 14 15 16 17 1-Feb 1Q17 2Q17 3Q17 4Q17 4.4280 4.46 4.50 4.56 4.55 4.67 4.52 4.78 4.54 Projected trading band Ceiling 4.6032 4.67 4.78 4.88 Floor 4.1790 4.25 4.35 4.46 Slope 9.2% depreciation a year for MYR Width 4.8% around mid 4.99 4.56 11 USD strength hits a roadblock 3 February 2017 Thai baht Our projected rise for the THB this year reflects a stronger USD, not a weaker THB • The THB was one of the three Asia ex Japan (AXJ) currencies that appreciated in 2016. Thailand’s current account totalled 16.6% of GDP in 2016, its strongest balance on record. Foreign reserves increased the most in the region to $172bn in 2016 from $156.5bn in the previous year. • The Bank of Thailand (BOT) expects a broad-based recovery in 2017 from three sectors – agriculture, exports and government spending. We see real GDP growth improving to 3.4% in 2017 from a projected 3.2% last year. • Yet, we don’t expect the BOT to follow the Fed in hiking rates this year. The central bank has pledged to keep monetary policy accommodative to foster a recovery at risk from global uncertainties. CPI turned positive in Apr16 and rose to 1.55% YoY in Jan17, just above the 1.50% policy rate and off the floor of its official 1-4% target. We forecast inflation to average 1.5% in 2017. • As for the exchange rate, the THB remains highly correlated with broad USD trends in the region. Its favourable fundamentals will, however, keep it volatile than its peers. USD/THB – back to mid of broad channel 38 38 Fed hike 37 37 Projected trading range 36 36 CNY deval 35 35 Trump victory 34 34 Brexit 33 33 DBSf ECB QE Consensus 32 31 31 BOJ QQE2 Fed taper 30 30 US loses BOJ QQE1 AAA 29 32 29 28 28 10 11 12 DBS Consensus 13 14 15 16 17 1-Feb 1Q17 2Q17 3Q17 4Q17 35.119 36.3 36.0 36.5 36.2 36.6 36.3 36.8 36.4 Projected trading band Ceiling 37.403 37.5 37.7 37.8 Floor 35.024 35.1 35.3 35.4 Slope 1.7% depreciation a year for THB Width 3.4% around mid 38.0 35.6 Indonesian rupiah USD/IDR to rise with global USD trends but the IDR will be more resilient compared to regional peers • USD/IDR has been stable in a tight 13260-13485 range after the Fed hike last December. Unlike many of its peers in the region, USD/IDR has not been trading in the upper, but the lower half of its multi-year ascending price channel. USD/IDR – in the lower half of price channel 15000 14000 13000 • DBS expects Standard & Poor’s to upgrade Indonesia’s sovereign debt rating, currently at BB+ with a positive outlook. We remain optimistic that real GDP growth will accelerate to 5.3% YoY in 2017. The economy is projected to have grown 5.1% in 2016 and ended a five-year slowdown. 12000 • Exports finally turned positive in 4Q16 after eight consecutive quarters of contraction. The 13.9% YoY expansion in 4Q16 was also the first double-digit gain since 3Q11. The export recovery will be positive for trade surpluses, which in turn, should help to keep the current account deficit stable around 2% of GDP this year. 9000 • CPI inflation bottomed at 2.79% YoY in Aug16. We see inflation rising to 4.5% in 2016 from 3.5% in 2016, from the floor towards the ceiling of its official 3-5% target range. BI is only expected to raise rates in 2H17. Fed hike 14000 CNY deval Projected trading range ECB QE BOJ QQE1 15000 13000 Brexit Trump victory BOJ QQE2 11000 DBSf Consensus 10000 12000 11000 10000 Fed taper 9000 US loses AAA 8000 11 DBS Consensus 12 13 8000 14 15 16 17 1-Feb 1Q17 2Q17 3Q17 4Q17 13370 13339 13600 13518 13740 13697 13800 13876 13826 Projected trading band Ceiling 14037 14152 14331 14510 Floor 12412 12526 12705 12884 Slope 5.3% depreciation a year for IDR Width 6.4% around mid 14689 13063 12 USD strength hits a roadblock 3 February 2017 Philippine peso Expectations remain firm for USD/PHP to end this year above its psychological 50 level • The PHP has been consolidating between 49.20 and 50.15 vs USD since mid-Nov, after its sharp depreciation in Aug-Nov. The worst level hit this year, at 50.147 on 19 Jan, was not seen since Nov 2008. Consensus including us expect USD/PHP to end 2017 above 50 from high but slower growth, rising inflation and weaker budget and trade positions. • Standard & Poor’s warned in January that the country’s sovereign debt rating was at risk from deteriorating external and fiscal positions. S&P currently rates the country at BBB with a stable outlook. President Duterte’s first (PHP 3.35trn) budget for 2017 is the largest given to any administration. Finance Secretary Carlos Dominguez is pushing tax reforms to stave off a rating downgrade to junk. • The current account surplus fell to 1% of GDP in 3Q16, its narrowest since 4Q08. The trade deficit in 2016 was worse than the previous three years. Unlike other countries, exports continued to contract amidst rising imports. CPI inflation rose to 2.5% YoY in Dec16 from its low of 0.9% in Feb16. With inflation moving off the floor of its official 2-4% target, the next move in rates is up. USD/PHP – consolidating in upper half of channel Projected trading range 52 52 51 51 50 50 Fed hike 49 48 DBSf Consensus CNY deval 47 48 47 BOJ QQE2 46 49 Trump victory Fed taper Brexit 45 46 45 44 44 ECB QE 43 43 42 42 41 41 BOJ QQE1 40 40 13 14 DBS Consensus 15 16 17 1-Feb 1Q17 2Q17 3Q17 4Q17 49.819 49.8 50.2 50.2 50.6 50.7 50.8 51.1 50.5 Projected trading band Ceiling 50.445 50.7 51.1 51.5 Floor 48.689 49.0 49.4 49.8 Slope 3.3% depreciation a year for PHP Width 1.8% around mid 52.0 50.2 Vietnam dong USD/VND’s market rate is less anxious than its official rate to global USD trends • The State Bank of Vietnam (SBV) lifted the official mid-rate for USD/VND to 22,202 on 25 Jan from 22,159 at end-2016. Despite this, the market-led USD/VND fell to 22,585 from 22,761 for the comparable period. • This should not come as a surprise. Investors remained confident in Vietnam’s growth potential in spite of the global geopolitical changes. Real GDP growth is expected to be above 6% for the fourth straight year in 2017. Vietnam stocks closed, as of 25 Jan, at their highest levels since Feb 2008. • Exports expanded 8.6% in 2016 from 8.1% in the previous year, its first full-year improvement since 2011. Vietnam was disappointed that US President Donald Trump cancelled the Trans-Pacific Partnership (TPP). • Managing inflation will be a challenge this year. After keeping inflation below the official target of 5% for 2016, the SBV is targeting an average 4% rate in 2017. While CPI was 4.74% YoY in Dec16, this was up from 0.80% in Jan16. Scepticism remains strong that SBV’s desire for stable rates will eventually give way to rate hikes. USD/VND – stable again after Trump rally 23500 DBSf Consensus 23000 23500 23000 Projected trading range Fed hike 22500 22500 Brexit 22000 Trump victory 22000 CNY deval 21500 21500 BOJ QQE2 BOJ QQE1 21000 Fed taper ECB QE 21000 20500 20500 12 DBS Consensus 13 14 15 16 17 2-Feb 1Q17 2Q17 3Q17 4Q17 22640 22782 22882 22782 23000 22782 23000 22782 23200 Projected trading band Ceiling 23181 23181 23181 23181 Floor 22547 22547 22547 22547 Slope 0.0% depreciation a year for VND Width 1.4% around mid 23181 22547 13 USD strength hits a roadblock 3 February 2017 Indian rupee USD/INR could still break above its 66.2-68.7 range established since early 2016 • USD/INR has been remarkably stable between 66.2 and 68.7 since early 2016. Externally, the INR weathered global risks such as the CNY devaluation, Brexit and Trump’s victory at the US presidential election. Domestically, the INR proved resilient to the redemption of Foreign Currency Non-Resident (Bank) or FCNR (B) deposits and the demonetisation of 500 and 1000 rupee notes. • The Indian stock market rallied in January in anticipation of a more tax friendly budget (on 1 Feb) to make India a more competitive investment destination. With inflation in the lower half of the official 4±2% target, there is room for one more rate cut by the Reserve bank of India (RBI). • Even so, there is little room for complacency. The INR was one of two Asia ex Japan currencies that did not appreciate in January. The demonetisation is, according to consensus, expected to push growth below 7% for three straight quarters into 2Q17. Higher oil prices and tax reforms could eventually lead to higher inflation and larger trade deficits at a time when the Fed is set to move from single to multiple rate hikes this year. USD/INR – still flat near the top Trump victory 80 75 Projected trading range DBSf Consensus Brexit Fed taper 80 75 70 70 65 65 60 60 55 Fed hike 50 CNY deval ECB QE BOJ QQE 55 50 45 45 US loses AAA 40 40 11 12 DBS Consensus 13 14 15 16 17 1-Feb 1Q17 2Q17 3Q17 4Q17 67.475 69.6 68.5 70.5 68.9 71.4 69.0 72.4 69.0 Projected trading band Ceiling 73.201 73.8 74.7 75.7 Floor 64.727 65.3 66.3 67.2 Slope 5.3% depreciation a year for INR Width 6.4% around mid 76.6 68.1 Australian dollar AUD/USD to move gradually lower with Fed hikes, but this will be balanced by recovery prospects • Consensus is keeping the door open for the Reserve Bank of Australia (RBA) to deliver one more rate cut. Real GDP contracted 0.5% QoQ in 3Q16, more than the minus 0.1% expected by consensus. CPI inflation was 1.5% QoQ in 4Q16, below the 1.6% consensus. • We, however, believe that the RBA is more likely to keep the cash rate target stable at 1.50% through 2017 instead. • On CPI, rose for the second straight quarter from its low of 1.0% in 2Q16. More importantly, consumer inflation expectations increased to 4.3% YoY in Jan16, and hit 4% for the first time since Dec15. • On the economy, trade tells a different story. Australia posted a trade surplus in Nov16, its first since Mar14. Exports performed strongly, helped by the rebound in commodity prices. On the domestic front, the jobless rate has risen again amidst slower wage growth. • With both headline and core inflation still below the RBA’s 2-3% target, the RBA need not to follow the Fed in hiking rates. AUD/USD – mild depreciation channel 1.10 1.10 BOJ QQE1 1.05 1.05 1.00 1.00 0.95 0.95 BOJ QQE2 0.90 0.90 Fed taper 0.85 Trump victory 0.80 Projected trading range 0.75 0.70 CNY deval 0.60 DBS Consensus 14 0.80 0.75 ECB QE 0.65 13 0.85 Brexit 15 DBSf Consensus Fed hike 16 0.70 0.65 0.60 17 1-Feb 1Q17 2Q17 3Q17 4Q17 0.7582 0.71 0.73 0.70 0.72 0.70 0.72 0.69 0.72 Projected trading band Ceiling 0.7707 0.77 0.76 0.76 Floor 0.6575 0.65 0.65 0.64 Slope -3.2% depreciation a year for AUD Width 8.8% around mid 0.75 0.64 14 USD strength hits a roadblock 3 February 2017 Recent Research IN budget: a balanced approach 2 Feb 17 SGD: sticking to neutral 7 Oct 16 Rates: global rates roundup 2 Feb 17 EZ: not taper time yet 7 Oct 16 TW: shifting into higher gear 27 Jan 17 CN: avoiding the Minsky moment 6 Oct 16 SG: time to recalibrate 26 Jan 17 IN: monetary policy committee lowers rates 4 Oct 16 EZ: ECB stays defensive 24 Jan 17 Qtrly: Economics-Markets-Strategy 4Q16 ID: looking at an S&P upgrade 19 Jan 17 CNH: SDR inclusion - right time, right place 8 Sep 16 US: pop goes the headline 18 Jan 17 IN: savings rate in need of a boost 2 Sep 16 Asia cyclical dashboard 17 Jan 17 IDR: towards further resilience 1 Sep 16 IN budget: stability over growth 12 Jan 17 SGS: on Fed watch 30 Aug 16 Rates: SGS: US-dependent 10 Jan 17 Global growth: redefining strength 26 Aug 16 IN: is oil the next headache? 13 Dec 16 TW: 5 things you need to know about the aging population 18 Aug 16 SG: risks beneath the GDP figures 18 Aug 16 CN: the risk of keeping status quo 17 Aug 16 Qtrly: Economics-Markets-Strategy 1Q17 15 Sep 16 8 Dec 16 ID: FDI much stronger than it appears 30 Nov 16 EZ: ECB challenged by higher bond yields 16 Nov 16 15 Nov 16 CN: why falling private investment growth is a worry 12 Aug 16 TW: 7 likely outcomes in 2017 Global: revenge of the demographic dividend 14 Nov 16 ID: tax revenues slipping 11 Aug 16 10 Aug 16 US: structural interest rate compression 2 Nov 16 SG: labour market pain FX: mid-quarter update 1 Nov 16 IN: monetary policy in transition 8 Aug 16 SG: down but not out 1 Nov 16 FX: DM vs EM - a more balanced story 1 Aug 16 Rates: global rates roundup 31 Oct 16 Rates: Global rates roundup / chart-pack 1 Aug 16 TW: diversifying into Southeast Asia 21 Oct 16 IN: hopes high for GST 26 Jul 16 CN: cyclical bottom 19 Oct 16 JP: will the helicopters fly? 20 Jul 16 IN: assessing current account improvement 18 Oct 16 ID rates: steepening risk 18 Jul 16 IN: more consumption-led growth 13 Jul 16 PHgov bonds: expensive (still) 11 Oct 16 FX: revisions to GBP & JPY 8 Jul 16 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 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 15