Download Currency Outlook-Why the JPY won`t weaken

Currency
OUTLOOK
Main contributors
David Bloom
Global Head of FX Research
HSBC Bank plc
+44 20 7991 5969
[email protected]
Stacy Williams
Head of FX Quantitative Strategy
HSBC Bank plc
+44 20 7991 5967
[email protected]
Daragh Maher
FX Strategist, G10
HSBC Bank plc
+44 20 7991 5968
[email protected]
Mark McDonald
FX Quantitative Strategist
HSBC Bank plc
+44 20 7991 5966
[email protected]
Paul Mackel
Head of Asian FX Research
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6565
[email protected]
Robert Lynch
Head of G10 FX Strategy, Americas
HSBC Securities (USA) Inc.
+1 212 525 3159
[email protected]
Ju Wang
FX Strategist, Asia
The Hongkong and Shanghai Banking Corporation Limited
+852 2822 4340
[email protected]
Clyde Wardle
Emerging Markets FX Strategist
HSBC Securities (USA) Inc.
+1 212 525 3345
[email protected]
Dominic Bunning
FX Strategist, Asia
The Hongkong and Shanghai Banking Corporation Limited
+852 2822 1672
[email protected]
Marjorie Hernandez
FX Strategist, Latin America
HSBC Securities (USA) Inc.
+1 212 525 4109
[email protected]
Murat Toprak
FX Strategist, EMEA
HSBC Bank plc
+44 20 7991 5415
[email protected]
Macro
Currency Strategy
February 2014
Why the JPY won’t weaken
Japan’s QE and associated JPY decline has not prompted a retaliatory
currency war within Asia, but the threat to currency peace is growing.
Furthermore, should Japanese exporters succeed in grabbing market
share, we could see an improvement in Japan’s external balance. In
addition, capital flows may act as a support for the JPY, especially
if the JPY’s role as a safe haven continues to be rebuilt.
FX: taking stock of any shock
We examine the performance of global FX during periods of equity
market weakness. Historically, the safe haven USD, JPY and CHF reign
supreme, but EUR and GBP could also gain. At the opposite end of the
G10 scale are the “risk on” currencies, where the CAD would be the
most exposed. In EM FX, all currencies tend to fall against the USD.
It is simply a question of deciding which is the more ugly.
Long-term forecasts
We publish our long-term FX forecasts up to 2020.
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
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Summary
Why the JPY won’t weaken
(pg 3)
Japan's QE and associated JPY decline has not yet prompted a retaliatory currency war within Asia, but
the threat to currency peace is growing. Furthermore, should Japanese exporters succeed in grabbing
market share, we could see an improvement in Japan's external balance. Finally, capital flows may act as
a support for the JPY, especially if the JPY's role as a safe haven continues to be rebuilt.
FX: taking stock of any shock
(pg 9)
We examine the performance of global FX during periods of equity market weakness. Historically, the
safe haven USD, JPY and CHF reign supreme, but EUR and GBP could also gain. At the opposite end of
the G10 scale are the “risk on” currencies, where the CAD would be the most exposed. In EM FX, all
currencies tend to fall against the USD. It is simply a question of deciding which are the more ugly.
Long-term forecasts
(pg 15)
Given the problems of forecasting out even one year, many are understandably reluctant to venture a view
for further out. However, we are aware that a number of our customers have a need for some indication of
the likely FX market direction over a longer term horizon for planning purposes. So again, with some
trepidation, we publish these longer term forecasts.
Macro Health Check
(pg 18)
We assess whether current growth in the 39 countries we cover is 'healthy' and sustainable or whether
downside risks are emerging. Some of the challenged countries we identify – Turkey, India, Indonesia
and Brazil – are already under pressure in the financial markets. In the G10 space, the UK has an equally
alarming current account deficit as troubled ‘fragile five’ countries and there are reasons for caution about
the Japanese recovery.
Asian FX: What would make us think differently?
(pg 20)
For some time, we have preferred North Asian currencies. The relatively sound balance of payment
positions and undervalued status of the KRW and the TWD are key sources of attraction. While our
central theme for 2014 is still that the paths of Asian currencies will diverge, with North Asian currencies
expected to outperform, we now take a closer look as what could make us think differently.
Dollar Bloc
(pg 22)
CAD: weaker now and later: We are adjusting our forecasts and now expect USD-CAD to reach 1.15
later this year. The CAD’s pronounced declines since the beginning of 2014, mainly caused by a change
in the BoC’s rhetoric and weaker fundamentals, have placed it as the worst performing G10 currency
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against the USD. We expect this broader fundamental and policy backdrop to continue to work against
the CAD in the coming year.
AUD: upside surprises are limited: We believe that any upside potential for the AUD from the current
level is limited. The RBA’s shift towards a more neutral policy bias should support the currency, however
fears over weaker Chinese economy and the broader uncertainty surrounding the emerging markets
should stem any upward moves.
NZD: trapped between ‘risk off’ and ‘carry’: We believe the local case for NZD outperformance
remains robust, but the uncertainty surrounding emerging markets and the possible continuation of riskoff mood could hit the currency in the medium-term.
Key events
Date
Event
17 February
18 February
19 February
26 February
4 Marc h
5 March
5 March
6 March
6 March
13 March
BoJ monetary policy meeting
UK CPI revisions published
FOMC minutes
Riksbank minutes
RBA rate announcement
Fed releases Beige Book
BoC rate announcement
BoE rate announcement
ECB rate announcement
RBNZ rate announcement
Source: HSBC
Central Bank policy rate forecasts
USD
EUR
JPY
GBP
Last
Q3 2014(f)
Q1 2015(f)
0-0.25
0.25
0-0.10
0.50
0-0.25
0.25
0-0.10
0.50
0-0.25
0.25
0-0.10
0.50
Source: HSBC forecasts for Fed funds, Refi rate, Overnight Call rate and Base rate
Consensus forecasts for key currencies vs USD
EUR
JPY
GBP
CAD
AUD
NZD
Source: Consensus Economics Foreign Exchange Forecasts January 2014
2
3 months
12 months
1.33
104
1.62
1.07
0.89
0.81
1.29
108
1.59
1.08
0.87
0.80
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Why the JPY won’t weaken
Trade up to JPY strength
External balances became fashionable once again
in the FX market during 2013. As fears about US
tapering took hold, the dividing line between
success and failure in emerging markets was
largely defined by the health or otherwise of the
current account balance. To judge by on-going
EM FX trauma, the early signs for 2014 are that
the balance of payments will remain central to
many EM currencies. But this fixation may spread
to engulf other currencies also. In Europe, the
improvement in the Eurozone’s current account
balance has already been offered by some as an
explanation for the EUR’s resilience – a view we
dispute (see ‘Currency Weekly: EUR: mythbuster’, 29 November 2013). If we believe the
substantially weaker in H2 14 (see ‘GBP: mind
the trade gap’, Currency Outlook, January 2014).
Given the market’s predilection for further JPY
weakness, Japan’s deteriorating current account
balance would be a tempting rationale for JPY
bearishness. However, we believe the opposite is
true. Japan’s external tribulations are set to
become a catalyst for JPY strength, not weakness.
Chart 1 shows Japan’s current account balance
and its trade balance expressed as a percentage of
GDP. The deterioration in both is clear. So despite
the JPY’s weakness since the middle of 2012, and
the associated optimism for exports, the external
balance has become a drag on growth rather than
a driver.
market is paying too much attention to the
Eurozone’s current account, we suspect it is
paying too little attention to the UK’s troubling
visible trade deficit which will likely see GBP
1. Japan’s external balance has been getting worse not better
%
Japan C/A balance, % GDP
Japan Visible trade balance, % GDP
%
5.0
5.0
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0
-2.0
-2.0
-3.0
-3.0
Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13
Source: HSBC, Bloomberg
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2. Export volumes have not collapsed elsewhere because of weaker JPY
Japan ex ports
Taiw an ex ports
South Korea ex ports
230
230
Volumes, Index , 2005=100
200
200
170
170
140
140
110
110
80
80
50
50
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Source: HSBC, Bloomberg
The worst is over for the external
balance
However, we believe the worst may already be
over for Japan’s external balance and that far,
from driving the JPY weaker, it may be a force for
stabilisation and potential appreciation. From a
cyclical perspective, import demand may weaken
when the consumption tax is introduced in
April this year.
Export demand should pick-up alongside
accelerating GDP growth in the bulk of Japan’s
main export markets. The US, Germany, Australia
and most economies in Asia ex-Japan are forecast
to show faster GDP growth in 2014 and 2015 than
in 2013. China may show a modest slowdown, but
with growth at an expected 7.4%, it will still be
very strong.
In addition, now that Japanese corporates have
seen the JPY weaken for eighteen months, there
may be greater confidence that this reflects a new
“norm”, and exports could be re-priced
accordingly to try and boost volumes. The
anomaly of stagnant export volumes could come
to an end (see ‘Chart of the Week: Why are
Japanese exports not booming?’, 24 January
2014), and so long as it is not entirely offset by
slimmer margins, the overall impact on the trade
4
balance should be beneficial. Those arguing for
additional JPY weakness as an echo of a
worsening external balance will have to re-think.
Corporate Japan and the
currency war
Our expectation that part of the revival in Japan’s
export volumes might be triggered by a shift in
the pricing behaviour of Japan’s exporters opens
up an additional currency angle – the currency
war. Japan has been at the forefront within G10 of
using its currency to secure an economic
advantage. We have written on this currency war
process extensively in the past, and have noted
that within Asia, both Korea and Taiwan have
been remarkably good economic citizens insofar
as they have not allowed themselves to be drawn
into the currency war.
Part of the explanation for their relatively relaxed
attitude is that Japan’s weaker currency seems so
far to have been used for expanding margins
rather than market share. Chart 2 shows export
levels for Japan, Taiwan and South Korea.
The recent performance shows that South Korea
has succeeded in expanding its export volumes
even as those in Japan moved sideways.
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3. JPY is among the most undervalued of currencies
Overvalued
SEK
CHF
ILS
NZD
SGD
GBP
NOK
PEN
EUR
RON
AUD
CNY
CAD
KRW
HKD
COP
PHP
BRL
33 34
31 32
30
29
27 28
Neutral
25 26
24
22 23
20 21
19
18
16 17
MXN
PLN
TWD
JPY
TRY
THB
CZK
IDR
ARS
USD
RUB
3
CLP
INR
1
2
4
ZAR
Undervalued
HUF
6
8
5
7
14 15
12 13
11
9 10
MYR
Valuation ranking
Source: HSBC, Bloomberg, OECD
Chart 3 shows our valuation ranking for the
currencies we cover. We have three metrics,
namely OECD purchasing power parity, the Big
Mac index, and the current real effective
exchange rate’s deviation from its 5-year average.
The JPY remains very much towards the
undervalued end of the scale, its blushes only
spared by the horrors faced by the “fragile five”
(in grey) which feature prominently on the left
hand side of the chart. In other words, the JPY is
at a valuation ranking currently generally being
suffered by those currencies under the market
microscope for potential market trauma.
It would be a mistake to assume that the next
pinch point in the currency war in Asia will come
if the Bank of Japan were to add to the current
pace of quantitative easing. Instead, the greater
threat comes from the corporate sector. If
corporate Japan’s export strategy were to change,
reflecting greater confidence that earlier JPY
weakness was not about to completely reverse,
then the threat of a shift in relative market shares
would become greater. The pressure for policy
elsewhere in Asia to act to offset Japan’s
currency-induced competitiveness could intensify.
This creates a number of problems for JPY bears.
First, it is a reminder that actively pursuing
additional JPY weakness via policy is likely to
come with international political repercussions.
The strategy of casting JPY depreciation as
simply some passive side-effect of monetary
policy attempts to reflate is already a difficult
marketing tactic. It gets harder the closer we get
to the inflation target. Japanese politicians have
long since given up talking about JPY weakness
as an on-going correction. More radical
suggestions, such as a government foreign bond
buying fund, are no longer floated. By extension,
it may temper expectations for the likely scale of
any fresh bout of QE. Finally, it is a reminder that
much is already in the price of the JPY.
Even looking beyond our valuation ranking, the
JPY’s decline is already well in excess of what
we saw for the USD during the Fed’s various
QE programmes.
JPY to capitalise on a capital
idea
Our valuation chart is also a reminder of the new
fragile environment in which emerging market FX
is operating, one which further undermines the
consensus case for relentless and steady JPY
weakness. One argument offered for JPY
weakness, in particular a rising USD-JPY
exchange rate, is that rising US yields will be in
contrast to low Japanese yields. This offers a carry
argument for a weaker JPY and also a balance of
payments argument via capital outflows. We are
not convinced by either.
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4. The JPY has regained its safe haven appeal
USD-JPY 100d correlations
0.9
0.9
Nikkei 225
10y bond y ields
RoRo
0.7
0.7
0.5
0.5
0.3
0.3
0.1
0.1
-0.1
-0.1
-0.3
-0.3
-0.5
-0.5
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14
Source: HSBC, Bloomberg
Chart 4 shows the correlation of daily changes in
USD-JPY against changes in the Japanese Nikkei
stock market index, US-Japan government bond
yield differentials, and HSBC’s risk on – risk off
(RORO) factor. The notable change over the last
couple of months has been the resurgence of the
RORO factor, shown in red in the chart. The JPY
may be a diminished safe haven because of the
distorting influence of the Bank of Japan’s
aggressive monetary policy, but recent events
have shown it still retains that appeal in times of
uncertainty. If markets remain nervous about
emerging markets, the consensus will have to
revisit their expectations.
Safe haven flows fall under the wider issue of
what capital flows mean for the JPY. When the
Bank of Japan loosened policy aggressively and
set an inflation target last April, some in the
market expected that this would encourage a large
portfolio outflow as Japanese investors increased
their purchases of overseas assets in anticipation of
a weaker JPY. While the JPY did weaken, Japan
has seen significant portfolio inflow. The majority
of this inflow has been in equities as overseas
buyers increased their holdings of Japanese
5. Portfolio flows are strongly inwards
Japan Portfolio balance (4Q MA, % of GDP)
6.0%
6.0%
4.0%
4.0%
2.0%
2.0%
0.0%
0.0%
-2.0%
-2.0%
-4.0%
-4.0%
-6.0%
-6.0%
-8.0%
-8.0%
-10.0%
-10.0%
1997
Source: HSBC, MoF
6
1999
2001
2003
2005
2007
2009
2011
2013
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6. Direct investment outflows continue
Japan Direct Inv estment balance (4Q MA, % of GDP)
0.0%
0.0%
-0.5%
-0.5%
-1.0%
-1.0%
-1.5%
-1.5%
-2.0%
-2.0%
-2.5%
-2.5%
-3.0%
-3.0%
1997
1999
2001
2003
2005
2007
2009
2011
2013
Source: HSBC, MoF
equities and domestic investors repatriated funds
into the domestic market (chart 5).
insufficient to cover the inflows from the current
account and portfolio flows.
So where did the capital outflow come from? Part
of the answer lies in direct investment flows.
Japan has run a deficit on direct investment for
many years and this has been increasing recently
as Japanese companies have increased their
investments abroad (chart 6). However, even at its
recent level of about 2.5% of GDP it is
Short-term outflows have dominated
Because the balance of payments must balance, it
is possible to estimate the implied short term
flows as a residual. In Japan’s case the current
position as a percent of GBP is roughly:
Short term outflow = Current account (+2%) +
Portfolio Flow (+4%) + Direct investment (-2.5%)
7. Implied short term outflows dominate at about 4% of GDP
Japan Implied short term flow s (4Q MA, % of GDP)
8.0%
8.0%
6.0%
6.0%
4.0%
4.0%
2.0%
2.0%
0.0%
0.0%
-2.0%
-2.0%
-4.0%
-4.0%
-6.0%
-6.0%
-8.0%
-8.0%
1997
1999
2001
2003
2005
2007
2009
2011
2013
Source: HSBC, MoF
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8. IMM positions are already significantly short
JPY - IMM net non-commercial positions ('000 contracts)
100
100
50
50
0
0
-50
-50
-100
-100
-150
-150
-200
-200
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Source: HSBC, Bloomberg
The implied short term outflow is thus about 3.5%
of GDP.
Chart 7 shows the implied short term flow for
Japan since 1997. Between 2004 and 2007 (the
heyday of the carry trade) the short term flow was
persistently negative and reached nearly 6% of
GDP by 2007. During the crisis, the short term
flow turned very positive (up to 8% of GDP) as
carry trades were unwound and safe haven flows
moved into the JPY. Now, the short term flow
has become sharply negative again. This implies
that the main driving force behind the JPY’s fall
has been flows that can slow or even be reversed
very rapidly.
In some ways, the JPY’s situation is the mirror of
that seen in sterling. The recent strength of GBP
has been largely driven by short term inflows
while the current account deficit has widened.
In the same way that we see downside risks for
sterling based on its vulnerability should short
term inflows dry up, we see upside risks for the
JPY should short term outflows fall back.
Further evidence of the short term nature of the
flows currently driving the JPY is shown in chart 8.
This shows the net IMM positions in the JPY (in
number on contracts). This measure reached a
8
maximum short position in 2007 at about
180,000 contracts, just ahead of the crisis.
The current short position is around
130,000 contracts, so it is again becoming extreme.
Conclusion
The large fall in the JPY since mid-2012 has been
driven by a growing market belief that the
Japanese authorities are seeking a weaker JPY as
part of their attempt to get the Japanese economy
out of a protracted period of weak growth and
deflation. Expectations are that this weakness will
be extended in 2014. However, the structure of
the Japanese external accounts suggests that the
risks are for a recovery in the JPY as the year
progresses. The Japanese current account surplus
is likely to improve again as the trade balance
recovers, and the capital outflow that recycles this
surplus has been heavily dependent on short-term
flows which can be rapidly reversed. In our view
it would be unwise to bet against the JPY in 2014.
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FX: taking stock of any shock
Winners and losers when
equities weaken
We examine how currencies behave when equity
markets are falling. At the moment, we are
witnessing the green shoots of a RORO revival.
A damaging cocktail of emerging market political
risk, US tapering fears, and some softer China
activity data has created a new debate about
whether we might be on the cusp of prolonged
and widespread emerging market weakness. We
believe not (see ‘The EM sell-off’, 27 January
2014), but one side-effect of this trauma has been
a rediscovery of the RORO concept, most evident
in the sharp decreases seen across equity markets
in late January. At the other end of the scale,
global bond markets have regained their safe
haven allure, returning us to the more familiar
spread of asset market behaviour evident during
the heights of RORO.
While the actual bounce in the RORO index has
been rather small so far, financial markets appear
to once again see the world from a RORO
perspective. This is not so surprising. After all, if
you are freshly worried about the world, the
easiest reflex is to return to the investment
approach you adopted when you were last
terrified about the world. RORO is that model.
For FX, this means it may be an opportune time to
re-visit the winners and losers should the poor
start for equity markets persist. One method
would simply be to calculate the correlations that
various currencies have with daily changes in a
stock market, for example the S&P 500. The
deficiency of this approach is that it captures the
currency behaviour both when equity markets are
rising and when equity markets are falling. All we
are interested in is what happens when equity
markets are falling.
1. “Risk on – risk off” is becoming (a little) more important
RORO Index
0.50
0.45
0.40
0.35
0.30
0.50
0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
0.25
0.20
0.15
0.10
0.05
0.00
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Source: HSBC, Bloomberg
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2. FX performance during specified periods of equity market weakness
FX performance v s USD during the three chosen periods of equity market w eakness ov er 2000-2013
Rank
Highest / low est ranking
Av erage ranking
Rank
CHF
CNY
CZK
DKK
EUR
HKD
SGD
JPY
0
HUF
ILS
5
0
PEN
TWD
5
NOK
GBP
10
PLN
10
CAD
MYR
15
NZD
SEK
15
IDR
ARS
20
CLP
COP
20
INR
AUD
25
MXN
25
RUB
KRW
30
ZAR
BRL
35
30
TRY
35
Source: HSBC, Bloomberg
So an alternative approach is to identify periods of
equity market weakness and then rank how
currencies performed against the USD. We have
chosen three periods of stock market declines:1
Mar 2000-Oct 2002: Dot-com bubble bursting
2
Oct 2007-Mar 2009: Global financial crisis
3
May 2013-Jun 2013: Initial taper fear
Chart 2 shows the average ranking of currencies
against the USD over these three periods. For
example, the CHF has the highest ranking, most
often at the top of the league table. The TRY and
ZAR, by contrast, are more frequently ranked
among the biggest losers. The bands around this
average show how the ranking has varied over the
three periods. Those at the extremes tend to
display rather small variations suggesting some
consistency in behaviour when equity markets are
falling. Interestingly, the vulnerable currencies
towards the left of the chart overlap to a large
extent with those currencies at the heart of today’s
concerns regarding current account fragilities. The
KRW and the MXN also feature, reflecting their
historical reputation as equity market plays. The
safe-haven CHF, CZK and CNY are prominent,
but it is surprising to see the variance in the JPY
10
as it fell quite sharply during the dot.com
bubble burst.
Finding your pain threshold
A short-coming of this analysis is that the results
could be different if we selected additional or
different periods of equity market weakness.
To overcome this, we now look at FX behaviour
during periods of equity market weakness in a less
arbitrary way. We look at how currencies1 have
performed when the S&P 500 has fallen by a
given percentage in a week. In this way, we can
examine whether the behaviour of currencies is
different when the stock market is falling
modestly compared to periods when the stock
market is falling swiftly. Chart 3 shows the results
for G10 currencies, and there is basically a 50:50
split between the winners and the losers.
1
For G10 currencies, we use equally-weighted indices. For
example, the CAD index is made up of an equally weighted
index of the CAD against the other G10 currencies. In turn,
this helps prevent the results for CAD being distorted
disproportionately by USD-CAD which would be the case
were we to use trade-weights or GDP weights. For EM, we
examine their performance versus the USD.
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FX v s S&P declines
S&P 500 has fallen
% of times the currency has risen when the
3. G10 FX performance when S&P500 is falling
USD
100%
100%
JPY
80%
80%
CHF
60%
60%
40%
40%
20%
20%
0%
0%
GBP
EUR
NOK
SEK
CAD
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
-6.0
-7.0
-8.0
-9.0
-10.0
AUD
NZD
% weekly change in S&P 500
Source: HSBC, Bloomberg
The order of these currencies shown in the legend
on the right reflects their performance when the
S&P500 has fallen by 10% or more in a week.
The results are not surprising, and likely reflect
most people’s perception about where these
currencies would lie on such a spectrum of risk
aversion. However, a 10% or greater weekly
decline is a very rare event.
USD to take over safe haven duties
What is more interesting is the relative
performance for smaller declines in the S&P500,
say by 3% or 4% in a week. Here, the CHF and
the JPY reign supreme, offering the most
consistent upside against their G10 peers. Their
ability to behave in this way again, however, is
now constrained. The CHF has limited room to
appreciate given the SNB’s EUR-CHF floor of
1.20. The JPY is also limited by central bank
action, with the BoJ’s active monetary expansion
providing a headwind to any sustained gains. The
threat of intervention should the JPY strengthen
excessively on a safe haven bid also looms large.
Thus, it is possible that were equity market
weakness to persist, the CHF and JPY could not
flex to the same extent as in the past, and the “go
to” currency could be the USD.
GBP and EUR could also capitalise
We are bearish GBP and EUR against the USD,
but one risk to this view is the prospect that GBP
and EUR could be favoured as safe havens.
History suggests it takes very big declines in
equity prices to encourage the market in EUR and
GBP. But the diminished potency of the CHF and
JPY as safe havens may mean that GBP and EUR
may enjoy this support even when stock market
declines are not so large.
NOK neutrality…to a point
Among the losers, some aspects are worth
highlighting. The NOK has rather a neutral
behaviour when equity market declines are
relatively modest. When the drops become more
pronounced, its performance deteriorates sharply.
One explanation is that the safe haven allure of
Norway’s strong current account and fiscal
surpluses is overwhelmed by concerns about its
lack of liquidity during periods of pronounced
global unease.
11
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Macro
Currency Strategy
February 2014
when the S&P 500 has fallen
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
0%
0
-1
ARS
CZK
ILS
IDR
-2
-3
BRL
HUF
ZAR
MYR
-4
-5
-6
-7
% weekly change in S&P
CLP
RUB
CNY
PHP
MXN
RON
HKD
SGD
-8
-9
-10
COP
TRY
TWD
THB
PEN
PLN
KRW
VND
% of times the currency has risen
60%
when the S&P 500 has fallen
% of times the currency has risen
4. Forget the detail, all EM currencies mostly fall against the USD when equity markets are falling
VEF
EGP
INR
Source: HSBC, Bloomberg
EM FX would become a battle of
the uglies
Local factors struggle to get traction among
G10 losers
The price action of the “risk on” currencies is not
especially differentiated, especially for the more
modest declines in the stock market. For the more
traumatic periods, the AUD and NZD fare worse
than the CAD and Scandies. It would be tempting
to argue that the NZD should outperform on the
basis of it stronger economy and rising interest
rates, but should equity markets continue to fall,
history suggests that the market will hit the more
We adopt a similar approach for EM FX in chart
4, the principal difference is that we have
confined the analysis to these currencies’
behaviour against the USD. Chart 4 is clearly far
busier than chart 3 given the multitude of
currencies on display, so please do not become
disheartened if you cannot discern the
performance of a particular currency. That is not
the aim of the chart. For now, we are less
interested in the performance of individual
currencies. Instead, the issue is the overwhelming
illiquid NZD hardest.
5. EM FX battle of the uglies
% of times currency has risen v s USD w hen S&P500 has fallen 4% or more in a w eek
Source: HSBC, Bloomberg
12
CZK
ILS
CNY
THB
HUF
HKD
VND
SGD
TWD
INR
PLN
CLP
RUB
MYR
PEN
0%
IDR
0%
TRY
10%
ZAR
10%
RON
20%
COP
20%
PHP
30%
ARS
30%
MXN
40%
KRW
40%
BRL
50%
VEF
50%
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Macro
Currency Strategy
February 2014
6. Relationships and causality between FX and other markets can change
US 10Y gov t bond y ield % (LHS)
Index of USD v s 'fragile fiv e' ex change rates (BRL, IDR, INR, TRY and ZAR), 100=01 May 13 (RHS)
3.3
124
3.1
119
2.9
2.7
114
2.5
2.3
109
2.1
1.9
104
1.7
1.5
99
01-May 21-May 10-Jun 30-Jun 20-Jul 09-Aug 29-Aug 18-Sep 08-Oct 28-Oct 17-Nov 07-Dec 27-Dec 16-Jan 05-Feb
Source: HSBC, Bloomberg
consistency of response. When the US stock
market is falling, all emerging market currencies
more often weaken against the USD than
strengthen. All are below the 50% line. So while
G10 has a 50:50 split between winners and losers,
for EM FX, the pattern is exclusively bearish.
Now we can drill down to individual currency
performance. Chart 5 examines how EM FX fare
against the USD when the decline in the S&P500
is 4% or more in a given week. Such a decline
would be consistent with a troubled equity
market, but not necessarily a traumatised one. The
pecking order is similar to that shown in Chart 2
when we confined ourselves to three somewhat
arbitrary periods of equity market weakness.
However, the ZAR, TRY and RUB are not quite
so poorly rated. The CZK, ILS and CNY remain
the relative EM safe havens.
Spare a thought for causality
The supposition of much of the earlier discussion
is that in a RORO world, the FX market takes its
cue from the stock market. However, as we have
seen recently, the FX market can sometimes be
the leader rather than the follower.
Chart 6 shows the currency performance of the
“fragile five” against US 10-year government
bond yields. Since May 2013, when tapering
fears began to take their toll on EM FX, the
fortunes of the fragile five have been determined
by US government yields. The higher the yields,
the worse the performance of these vulnerable
currencies. However, more recently, the
relationship has flipped. Currency weakness for
the fragile five has seen US yields fall due to a
safe haven bid. Rather than yields driving FX,
currencies are now driving bond prices.
Extending this logic further highlights a more
problematic and damaging causality. We illustrate
this in chart 7. Under normal conditions, the
economy might drive interest rates and the stock
market, and this in turn could determine the
performance of the currency. However, under a
currency crisis situation, the causality can run in
the opposite direction. The currency dictates the
move in interest rates which in turn determines
the fortunes of both the stock market and the
economy. FX can rule the roost.
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Macro
Currency Strategy
February 2014
7. In a crisis, FX can become the driver to economic fortunes
1. Normal Conditions
Economy
Rates
FX
Equities
2. Crisis Conditions
Economy
Rates
Equities
Source: HSBC
Conclusion
The decline in equity markets since the start of the
year has revived RORO as a driver to global
currencies. In examining how currencies behave
during periods of stock market declines, the usual
suspects feature among the safe havens and “risk on”
plays. But with the CHF and JPY constrained by
local policy choices, the USD may surface as the
safe haven of choice, perhaps joined by EUR and
GBP. In emerging market FX, it will remain a battle
of the uglies, with all currencies historically
struggling against the USD when the US stock
market is weak. But it is also important to remember
that FX need not always be a follower of other
markets. US Treasury yields used to drive EM FX,
now they follow it. In normal times, the economy
drives FX, but the danger is that should the FX crisis
intensify, it will be currencies that dictate economic
fortunes, not the other way around.
14
FX
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Macro
Currency Strategy
February 2014
Long-term forecasts
Long term planning
assumptions
We normally publish FX forecasts with about an
18-24 month time horizon. The purpose of these
forecasts is to give customers a very short hand
way of identifying where we see the principal
risks in the FX market over the next year or so.
As always, we would caution against taking our
point forecasts too seriously. They are only
designed to show whether we see the principal
risk as being that a currency goes up or down, a
little or a lot over the coming year. Long
experience has shown us that when we are
basically right on market direction, the market
moves further and more quickly than we dare
forecast, and one year targets can be reached very
quickly. When we have the direction wrong, we
can be wrong for a very long time.
Given the problems of forecasting out one year,
many are understandably reluctant to venture a
view for further out. However, we are aware that a
number of our customers have a need for some
indication of the likely FX market direction over a
longer term horizon for planning purposes. So
again, with some trepidation, we publish longer
term forecasts. If our one year forecasts need to be
treated with caution, it goes without saying that
Methodology
The forecasts presented on the following two
pages are based on the following methodology:
1
Short-term forecasts to the end of 2015 are
taken from our existing numbers
2
We estimate long term ‘fair value’ exchange
rates based on a rate that would be consistent
with long term external balance sustainability.
These are essentially PPP values adjusted for
some notion of sustained long term capital
flows and are sometimes called fundamental
equilibrium exchange rates (FEERs). For a
discussion of these, and alternative estimates,
see Peterson Institute for International
Economics, Policy Brief, June 2010.
3
We assume a gradual convergence to the long
term ‘equilibrium’ levels over the five years
beyond our short-term forecast horizon.
Compared with the last time we reviewed our
long term forecasts (see Currency Outlook
‘August 2013’, August 2013), the major changes
have been in the EM currencies, in particular the
so-called ‘fragile five’ group. In the G10 space,
we see Sterling and the euro as already close to
long term ‘fair value’ levels.
the longer term numbers are even less to be relied
upon. Nevertheless, we are aware that decisions
and plans have to be made, and that a defensible
set of forecasts may be of some value.
15
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Macro
Currency Strategy
February 2014
Long term forecasts versus USD
2016f
Average year
Americas
x
x
x
x
x
Canada (CAD)
Mexico (MXN)
Brazil (BRL)
Argentina (ARS)
Venezuela (VEF)
Chile (CLP)
Colombia (COP)
Peru (PEN)
Uruguay (UYU)
x
2017f
x
2018f
x
2019f
2020f
x
1.12
12.90
2.69
15.40
22.50
560
2020
2.70
24.30
1.10
13.00
2.79
17.90
30.00
570
2040
2.70
25.20
1.10
13.10
2.87
20.00
30.00
580
2060
2.70
26.00
1.10
13.20
2.94
22.30
45.00
590
2080
2.70
26.60
1.10
13.30
3.01
24.90
60.00
600
2100
2.70
27.25
Eurozone (EUR*)
x
UK (GBP*)
Sweden (SEK)
Norway (NOK)
1.25
x
1.50
6.64
5.76
1.25
x
1.50
6.64
5.76
1.25
x
1.50
6.72
5.76
1.25
x
1.50
6.72
5.76
1.25
Russia (RUB)
Hungary (HUF)
Turkey (TRY)
37.8
223
2.15
39.0
224
2.15
40.1
224
2.20
41.3
224
2.25
42.6
224
2.25
x
Japan (JPY)
India (INR)
Australia (AUD*)
New Zealand (NZD*)
95
60.0
0.85
0.80
90
58.0
0.80
0.75
90
55.0
0.75
0.70
90
55.0
0.75
0.70
90
55.0
0.75
0.70
China (CNY)
Hong Kong (HKD)
Taiwan (TWD)
South Korea (KRW)
5.80
7.80
29.5
1070
5.70
7.80
30.0
1130
5.60
7.80
30.0
1200
5.50
7.80
30.0
1200
5.50
7.80
30.0
1200
34.0
3.38
12000
47.0
1.24
33.5
3.42
11600
48.5
1.22
33.5
3.45
11200
50.0
1.20
33.5
3.45
11200
50.0
1.20
33.5
3.45
11200
50.0
1.20
10.00
10.00
10.00
10.00
10.00
Western Europe
Other Western Europe
x
x
x
x
Emerging Europe
x
x
x
Asia/Pacific
1.50
6.72
5.76
North Asia
x
x
ASEAN 5
x
x
x
Africa
x
Source: HSBC
16
x
Thailand (THB)
Malaysia (MYR)
Indonesia (IDR)
Philippines (PHP)
Singapore (SGD)
x
South Africa (ZAR)
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Macro
Currency Strategy
February 2014
Long term forecasts versus EUR and GBP
average year
Vs euro
Americas
x
x
Europe
x
x
x
x
x
x
x
x
Asia/Pacific
x
x
x
x
x
US (USD)
Canada (CAD)
x
UK (GBP)
Sweden (SEK)
Norway (NOK)
Switzerland (CHF)
Russia (RUB)
Poland (PLN)
Hungary (HUF)
Czech Republic (CZK)
x
Japan (JPY)
Australia (AUD)
New Zealand (NZD)
Vs sterling
Americas
x
x
Europe
x
x
x
x
x
Asia/Pacific
x
x
x
x
x
US (USD)
Canada (CAD)
x
Eurozone (EUR)
Sweden (SEK)
Norway (NOK)
Switzerland (CHF)
x
Japan (JPY)
Australia (AUD)
New Zealand (NZD)
2016f
2017f
2018f
2019f
2020f
x
x
1.25
1.40
1.25
1.38
1.25
1.38
1.25
1.38
1.25
1.38
0.83
8.30
7.20
1.30
47.3
3.80
290
26.0
0.83
8.30
7.20
1.35
48.8
3.70
280
25.0
0.83
8.40
7.20
1.40
50.1
3.60
280
24.5
0.83
8.40
7.20
1.40
51.6
3.60
280
24.0
0.83
8.40
7.20
1.40
53.3
3.60
280
24.0
119
1.47
1.56
113
1.56
1.67
113
1.67
1.79
113
1.67
1.79
113
1.67
1.79
1.50
1.68
1.50
1.65
1.50
1.65
1.50
1.65
1.50
1.65
0.83
0.83
0.83
0.83
0.83
10.0
8.6
1.56
10.0
8.6
1.62
10.1
8.6
1.68
10.1
8.6
1.68
10.1
8.6
1.68
143
1.76
1.88
135
1.88
2.00
135
2.00
2.14
135
2.00
2.14
135
2.00
2.14
Source: HSBC
17
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Currency Strategy
February 2014
Macro Health Check
This is an extract from the full report: ‘Macro
Health Check: Scanning for warning signs in the
global economy’, 24 January.
The recent emerging markets experience is a clear
example of how focusing on the most likely
outlook for growth we lose track of vulnerabilities
that are accumulating. When global liquidity was
cheap and abundant emerging market growth
appeared unstoppable. However, the very mention
of Fed tapering and reversal of global capital
flows revealed serious deficiencies including
ballooning current accounts and infrastructure
weakness. We try to assess whether current
growth in the 39 countries we cover is 'healthy'
and sustainable or whether downside risks are
emerging. We highlight any countries which
receive a number of ticks on the checklist below:
 Balanced growth – We consider whether
GDP has moved up from trend and whether
the labour market has become much tighter.
We then look at some of the details of GDP
considering if either investment or
consumption have materially gained
momentum relative to the trend seen in the
five years before.
 Borrowing from the future – Here we focus
on any deficits or surpluses that are
accumulating in the country’s current account
positions and changes in FX reserves.
Holdings of FX reserves are arguably more
important for emerging economies. We then
look at sectoral deficits considering
government finances, broad money growth
18
and lending by the household and
corporate sector.
 Structural issues – The variables so far
described tell us something about the
pressures of demand. But supply side of the
economy is just as important. A demand
shock coupled with supply side problems and
bottlenecks is more likely to quickly escalate
into inflation.
We were able to identify that above trend GDP
growth, credit growth, investment booms and
deteriorating current account positions are the
most reliable indicators of potential future trouble.
By contrast, inflation and fiscal positions often
remain benign providing false signals of health.
The diagnosis
Following the checklist above some of the
challenged countries we identify are:
Indonesia, Brazil, Turkey and India: The
problems in these economies have been well
covered in recent months with their precarious
current account positions receiving most attention.
Markets have moved significantly but the
economic ‘adjustment’ has barely begun. The
recent rate hikes have reduced credit availability
to corporates which brought slowdown in
investment spending. Yet given the state of
infrastructure in all these economies this is where
spending is required. Inflation remains sticky. The
currency declines have no doubt contributed by
pushing up headline inflation while capacity is
still tight with unemployment near record.
Corporate liquidity has deteriorated markedly in
Karen Ward
Senior Global Economist
HSBC Bank plc
+44 20 7991 3692
[email protected]
James Pomeroy
Economist
HSBC Bank plc
+44 20 7991 6714
[email protected]
abc
Macro
Currency Strategy
February 2014
Turkey, India and Brazil in the past year, leaving
firms vulnerable to further interest rate hikes
should they be required.
Further, for all these economies fiscal deficits
remains a major drag on growth. With elections
this year in all these economies, rebalancing the
fiscal books and structural reform are unlikely to
be policy priorities. So far this has caused the
central bank to take the main role in attracting
capital, rather than the fiscal macro and micro
adjustment required to really alter the course.
South Africa is the other country that collectively
makes up what the market has come to refer to as
‘the fragile five’. However, on our health check it
raises fewer concerns than others in the club.
The economy has already slowed a long way,
credit growth is moderating and the corporate and
banking sectors look less vulnerable.
Philippines and Malaysia: These economies
have been under the radar in the recent EM
sell-off because they are not in the ‘current
account deficit club’. But there are still reasons
for closer scrutiny. Growth remains extremely
strong, indeed Malaysian consumption grew at
almost 9% last year. Investment is also bumper,
so much so that the fact growth is not higher
implies productivity is falling. The Philippines has
seen a massive pick up in broad money growth
following FX intervention, but it isn’t clear if this
intervention is being adequately sterilized given
corporate liquidity ratios have deteriorated. Both
economies are running a current account surplus,
although the size of Malaysia’s surplus fell
markedly in 2013. The fiscal positions in both
countries are somewhat less healthy.
Japan: ‘Abenomics’ has managed to kick-start the
Japanese economy. Growth has picked up but
despite the massive decline in the yen the current
account position hasn’t improved and the fiscal
deficit remains large. The question is whether
growth can be maintained beyond the consumption
tax hike in April. There has so far been a very
limited pick up in any measures of money growth
or credit. Most of the promise of higher
productivity lay with Abe’s third arrow –structural
reform. However, disappointingly, Japan’s ease of
doing business rank is not only low by developed
world standards but getting worse.
UK: After years of stagnation, the UK’s recovery
has finally begun. However, the foundations of
growth are not strong. Despite the weakness of
sterling, the UK’s current account position hasn’t
improved. Indeed, only Colombia, Turkey and
South Africa’s current account positions were
worse in 2013. With considerable policy stimulus
still in the system, attention is turning to the Bank
of England’s exit strategy. However the UK’s
fiscal position remains dire, which begs the
question whether the removal of stimulus
shouldn’t be fiscal withdrawal.
Colombia & Chile: Colombia and Chile have
both performed well in recent years and appear to
be at capacity. The labour markets are particularly
tight. Both have seen a material deterioration of
their fiscal positions and credit growth is rapid.
The quality of lending is of particular concern in
Chile. Measures of corporate liquidity have
deteriorated markedly and there is a relatively
poor level of capital to risk-weighted assets in the
banking system. In Colombia the structural
problems are of more concern. Infrastructure is
both poor and deteriorating. The high level of
youth unemployment raises the potential for
social unrest.
Egypt & Argentina: Serious concerns are
apparent but also well known for Egypt and
Argentina. Rapid money growth to fund large
fiscal deficits and falling FX reserves are all
components of the story.
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Macro
Currency Strategy
February 2014
Asian FX: what would
make us think differently?
This is an extract from the full report: Asian FX
Focus: What would make us think differently?,
28 January 2014.
For some time, we have preferred North Asian
currencies. The relatively sound balance of
payment positions and undervalued status of the
KRW and the TWD are key sources of attraction.
Although we expect the divergence between
North Asian currencies and others in the region to
persist in 2014, we acknowledge that there are
potential developments that could make us change
our mind.
There are two factors that could hinder the
performance of North Asian currencies, in
particular the KRW and the TWD:
1
A significantly weaker JPY
Although, significant JPY weakness is not our
central case, if happens, this could be negative for
its North Asian neighbours. For instance, in Korea
persistent JPY weakness in 2013 raised concerns
over corporate earnings and thus equity
performance of large Korean exporters. While we
believe that the KRW has become more of a
“bond currency” in recent years, there is still a
link between equity flows and the KRW. For
Taiwan, export data continue to disappoint
(despite moderate improvements in export orders)
and the trade surplus shrunk in December 2013.
20
The degree of sensitivity of both currencies to the
JPY weakness will also depend on the pace and
nature of JPY depreciation. If Japanese corporates
respond to on-going JPY weakness via downward
price adjustments it could be more telling for the
KRW and the TWD. But so far there has been
little evidence (see ‘Chart of the Week: Why are
Japanese exports not booming?’, 24 January
2014). But even then, the negative impact of a
weaker JPY should not be overstated. Although
Korea and Taiwan both export similar goods to
Japan, on a bilateral basis, both are net importers
from Japan and a weaker JPY could help to
reduce import costs.
2
A slower Chinese economy
The bigger risk for both currencies is from a
sharper slowdown in China’s growth and import
demand. Compared to the rest of the countries in
the region, Korea and Taiwan’s exports to China
as percentage of their total exports are among the
highest. Weaker Chinese economy would clearly
impact many other currencies too, but the first
impact would likely be a much weaker KRW and
TWD. The nature of a China slowdown also
matters. If China’s growth slows in terms of
exports and investment but domestic demand and
imports both hold up well, then Taiwan and
Korea’s exports may not suffer as badly. One
possible offsetting factor to slower growth in
China is that both Taiwan and Korea are net
commodity importers. They could therefore
benefit from lower commodity prices.
Paul Mackel
Head of Asian FX Research
The Hongkong and Shanghai
Banking Corporation Limited
+852 2996 6665
paulmackel @hsbc.com.hk
Ju Wang
Senior Asian FX Strategist
The Hongkong and Shanghai
Banking Corporation Limited
+852 2822 4340
[email protected]
Dominic Bunning
Senior Asian FX Strategist
The Hongkong and Shanghai
Banking Corporation Limited
+852 2822 1672
[email protected]
Julia Wang
Analyst
The Hongkong and Shanghai
Banking Corporation Limited
+852 2996 6568
[email protected]
Aditya Jagati
FX Associate
Bangalore
abc
Macro
Currency Strategy
February 2014
RMB to remain resilient, but forwards are
too low
remains elevated for much of the region. Should
we see faster-than-normal deleveraging, coupled
with structural reforms, conditions would likely
warrant a more optimistic view towards Asian
currencies that have struggled.
As far as the RMB is concerned, a slower Chinese
economy is less likely to harm the currency. In such
a scenario, the RMB would likely prove to be
resilient due to China’s relatively closed capital
account, high interest rate advantage, solid FX
reserve coverage, and a still positive current
account. The rising concern over domestic leverage
and growth slowdown will likely hurt the currency’s
long-term appreciation outlook. However, we see
limited depreciation risk as policymakers are likely
to put financial stability and the RMB’s
internationalisation ahead of exports.
The initial impact of slower credit growth may not
be positive for the local currency but it would
point to a higher probability of better external
balances appearing further out. This has been
happening to an extent for some countries already,
especially in India. This helped reduce the
depreciation pressures on the INR in 2013.
US Treasury yields & FX hedging
3
Finally, another factor to bear in mind for
currencies such as the KRW and the TWD is the
potential for the acceleration in outward
investments by domestic investors if US yields
continue to move higher. This could see more
outflows, and potentially less FX hedging on the
investments, putting pressure on their currencies.
Southern Asia: deleveraging, inflation
and valuation
What could act as an impetus for Southern Asian
currencies to move onto a sounder footing?
1
The inflation backdrop of those currencies
suffering from negative real rates
Most Southern Asian economies are facing rising
price pressures and monetary policy may still
need to play catch up (India and Indonesia are two
obvious cases). Some of the others are also
suffering from negative real interest rates
(Malaysia, the Philippines and Singapore). If
policymakers deliver tighter monetary policy
amidst a calmer market, this may further increase
the attractiveness of their assets and currencies.
However, we also need to connect this to what is
needed to change the credit cycle. In a few
countries credit growth has softened, although it
2
Improvement in external balances
More attractive valuations of either the
currencies or respective local assets
For now, the INR alone stands out as relatively
inexpensive from a REER perspective. Most other
currencies in the region have cheapened since the
middle of 2013. However, few are signalling
material value just yet, and most still appear to be
overvalued compared to North Asian currencies.
Watch the DM recovery
Something that matters for all EM Asian
currencies, is how broad-based a USD rally will
be in 2014. If US data were to turn for the worse
and US Treasury yields would come back down,
this could lead to a renewed hunt for higher
returns. This would likely benefit the Southern
Asian currencies more than their North
counterparts. Moreover, we think North Asian
currencies have benefited more from the recently
strong EUR via trade competitiveness and the FX
policy channel. However, we believe that the
USD will “spread its wings” against the EUR (see
‘Currency Outlook: USD rally to spread its
wings’, 8 January 2014) and this could take away
some support for North Asian currencies.
21
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Macro
Currency Strategy
February 2014
Dollar Bloc
CAD: weaker now and later
The Canadian dollar’s weakening trend in late2013 accelerated in January, putting the currency at
its lowest levels against the USD in four-and-a-half
years. The CAD’s more pronounced declines have
placed it as the worst performing G10 currency
against the USD in the year-to-date (-3.5%)
(chart 1), and by a wide margin. That is partly a
function of a change in Bank of Canada rhetoric,
which encouraged additional CAD declines on top
of those already stemming from prior shifts in
broader fundamental conditions. We have been
bearish on the CAD but its declines have already
reached some of our late-year targets. As such, we
are adjusting our forecasts and now expect USDCAD to reach 1.15 later this year.
reducing its bond buying program. That event
supported the USD and contributed to downward
pressure in a broad range of currencies, including
the CAD. That was followed later last year by the
Bank of Canada’s decision to drop its tightening
bias, a dovish shift by the Bank and one that was
accompanied by a shift in US-Canada interest rate
differentials that reduced the CAD’s interest rate
cushion. The BoC’s shift was in fact prompted by
sluggish growth and low inflation in Canada’s own
economy, another drag on the CAD. And broader
shifts have also been seen in Canada’s trade
position – from surplus to deficit earlier in the
global financial crisis – as well as the peak and
subsequent decline in the global commodity cycle.
The Bank of Canada weighs in
With those cyclical and structural factors
weighing in, the CAD had been falling slowly but
steadily, most notably since Q4-2013 but really
since late-2012. However, in January the Bank of
Canada added another element of stress to its
currency. In its January policy statement, the BoC
Markets have certainly become aware of the
changing backdrop for the CAD. Some of the shift
away from persistent years of CAD strength
followed the Federal Reserve’s comments in May
and June of 2013 indicating its intention to begin
1. CAD is the worst performer in G10 so far this year
3
%
G10 FX performance v s USD, 2014 YTD, %
%
2.62
2
1.33
2
1.28
1
3
1
-0.02
0
0
-1
-0.61
-0.64
-0.77
-1
-0.9
-2
-2
-3
-3
-4
-3.53
JPY
Source: HSBC, Bloomberg
22
AUD
NZD
SEK
CHF
GBP
EUR
NOK
CAD
-4
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Macro
Currency Strategy
February 2014
retained its neutral bias, contrary to scattered
speculation they could adopt an easing bias. But
with inflation expected to remain well below the
2% target for “some time,” the downside risks to
inflation have become more important. In the
wording of its forward guidance, it removed the
phrase, “the Bank judges that the substantial
monetary policy stimulus currently in place
remains appropriate,” and in deciding to keep the
overnight target rate at 1%, said instead, “The
timing and direction of the next change to the
policy rate will depend on how new information
influences this balance of risks”. That is still a
neutral bias, but the new statement opens the door
for a possible policy easing that previous guidance
did not. And the current stance is no longer is
described as representing “substantial monetary
policy stimulus.”
CAD weakness welcomed
On the currency, the accompanying Monetary
Policy Report noted the “persistent strength” of
the CAD, and said that despite the currency’s
recent depreciation, it “remains strong and will
continue to post competitiveness challenges for
Canada’s non-commodity exports.” In a press
conference that followed, BoC Gov. Poloz was
more specific. While acknowledging that US
conditions are the key driver of exports, he said
that CAD weakness is still a benefit to the
Canadian economy, and that the decline in the
currency is “icing on the cake” for the country’s
exporters. Although he attempted to highlight the
much greater weight/importance of US demand
dynamics in terms of supporting the country’s
exports and exporters, FX market participants will
judge his comments as ones that welcome
weakness in the currency.
A shift in rhetoric and emphasis
Further, when Poloz took over as Governor in
mid-2013, he made some changes to the way the
Bank characterized the currency. In parliamentary
testimony that June, responding to a question
about the CAD in relation to potential support to
the country’s exporters, he said, “I won’t offer a
running commentary on the Canadian dollar,
where it is and where it should be.” And he
backed that up in July 2013 by removing what had
been a long standing reference to the CAD’s
“persistent strength” in the Bank’s periodic policy
statements. However, these more recent
developments represent a change to that initial
guidance. And somewhat surprisingly, the MPR’s
new characterization that the CAD “remains
strong” followed the currency’s 6%-plus
depreciation versus the USD since last summer.
The BoC’s shift in emphasis, and its timing, has
understandably received the market’s attention
and will add to headwinds for the CAD.
During the global financial crisis, as the CAD
appreciated during several rounds of Fed QE and
the associated USD weakness, we often referred
to Canada as the ultimate “good sport” in the
world’s currency wars that occasionally flared.
We used that description because Canadian
authorities, unlike those from many other
countries, generally refrained from being drawn
into that war. They tended not to criticize the
global effects of easy Fed policy or complain
about CAD strength. But now, with global
conditions normalizing (or at least evolving), and
with the CAD’s “overvaluation” reversing, the
shift in the BoC’s language marks a potentially
quite important shift by policy makers.
Inflation data takes on greater weight
All of the economic data can matter but the
inflation data are particularly important, as low
inflation has received greater emphasis from the
BoC. The latest CPI data showed a rise to 1.2%
YoY in December from 0.9% YoY in November.
That reading at least brings it back up into the
BoC’s target band (1%-3%) but still leaves
inflation too low for the BoC’s liking. Headline
23
Macro
Currency Strategy
February 2014
CPI has ranged from 0.4% to 1.2% since Q3 of
2012. Of course, the BoC targets future inflation,
not current inflation. But the persistently low
readings of headline CPI have clearly raised more
concern about overall inflation backdrop. As
such, the upcoming inflation data and inputs to it
will take on potentially more significance to
interest rates and the CAD, with even lower
readings increasing the perceived risk of easing
and weighing on the currency, while higher
readings would reduce easing expectations and
likely work to the currency’s advantage.
Conclusion
We noted at the outset that the CAD was the
worst performing currency against the USD in the
year-to-date. It is also the case that positioning
data shows a significant increase in short CAD
positions. Those conditions increase the potential
for some near-term consolidation in USD-CAD,
rather than type of accelerated gains as were seen
in January. But the broader fundamental and
policy backdrop is one that should continue to
work against the CAD in the coming year. As a
result, we expect further upward pressure on
USD-CAD, and now expect it to finish 2014 at
1.15, up from our previous forecast of 1.10.
24
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Macro
Currency Strategy
February 2014
AUD: upside surprises
are limited
Up until the beginning of February the AUD has
been on a clear downward path (chart 1). In
particular, during the recent EM FX rout the AUD
was one of the G10 currencies that suffered the
most. Although, despite falling 1% against the
USD during the period of 22-28 January, the
currency has actually been one of the best
performers in the G10 arena following the
emerging market sell-off. We believe that any
upside potential from the current level of around
0.90 is limited. The RBA’s shift towards a more
neutral policy bias is clearly a positive
development for the AUD. However, occasional
disappointing news from China and the broader
uncertainty surrounding emerging markets are
likely to temper any significant upward moves in
the AUD.
The AUD performed extremely well over the first
two weeks of February appreciating 2% against the
USD. The main catalyst for the rally was a shift
away from the previous easing bias at the RBA’s
4 February meeting. The central bank left the cash
rate unchanged but added forward guidance by
saying that the 'most prudent course is likely to be a
period of stability in interest rates'. They also
dropped the repeated comment that the AUD is
‘uncomfortably high’. The commitment to maintain
1. Up until recently AUD-USD was trending downwards
stability in the interest rate path is likely persist,
while the tone regarding the level of the AUD may
change swiftly. Were the level of AUD to rise, we
may see the RBA trying to talk the currency down
again, and as previous evidence suggests, they tend
to be successful.
Australia economic fundamentals still remain
wobbly. On 13 February, jobs numbers surprised
on the downside again with employment falling
by 4K against expectations of a 15K rise while the
unemployment rate was higher than consensus
(6.0% vs exp 5.9%). With patchy local data, the
AUD would be vulnerable to any fresh ‘risk off’
mood in global markets.
Another point of worry is Australia’s close
relationship with the economic performance of
Asia and, particularly, China. Chart 2 shows that
trade-weighted AUD has closely followed China’s
PMI manufacturing data since 2011. The flash
HSBC manufacturing PMI eased by more than
expected, to a six-month low of 49.6 in January.
This was a second disappointing PMI release form
China as December data showed some slowdown.
While a Chinese slowdown is not our central case
scenario, if the data continues to disappoint, this
will certainly weigh negatively on the AUD.
2. There is a link between the AUD and China PMI data
Trade-w eighted AUD
HSBC China PMI manufacturing
AUD-USD
0.97
0.94
0.91
0.97
0.94
0.91
0.88
0.88
0.85
0.85
Sep-13 Oct-13 Nov -13 Dec-13 Jan-14 Feb-14
Source: HSBC, Bloomberg
30%
6m rolling % change
30%
20%
20%
10%
10%
0%
0%
-10%
-10%
-20%
-20%
-30%
-30%
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Source: HSBC, Bloomberg
25
abc
Macro
Currency Strategy
February 2014
NZD: trapped between ‘risk
off’ and ‘carry’
The combination of the RBNZ’s ‘no change’
policy announcement and the EM FX troubles has
seen the NZD particularly choppy so far in 2014.
We believe that the NZD is trapped between two
opposing forces in the medium-term. The local
factors such as sound fundamentals and higher
rate expectations point towards NZD
outperformance, but the uncertainty surrounding
emerging markets and the possible continuation of
risk-off mood could temper the currency’s move
higher. However, in our view, as the year
progresses and domestic interest rates begin to
rise the carry phenomenon should bring further
support for the currency, and this should see the
NZD higher.
Similarly to the AUD, the Kiwi performance since
EM FX calmed down was mainly driven by the
outcome of the central bank meeting. On 29 January
the RBNZ left its cash rate unchanged at 2.50%. The
unchanged policy rate disappointed the market,
although a hike at that meeting was a minority view.
The central bank was noticeably more upbeat on the
outlook for domestic activity, although they said that
they don’t believe the current level of exchange rate
is ‘suitable in the long run’. This was viewed as the
main reason for them to leave the rates on hold.
Despite the concerns over the high level of the
2. The NZD looks stretched on the valuation basis
0.80
Source: HSBC, Bloomberg
26
Jan-14
Feb-14
Source: HSBC, Bloomberg
JPY
0.80
CAD
0.81
AUD
0.81
NOK
0.82
USD
0.82
EUR
0.83
CHF
0.83
% gap betw een current trade-w eighted REER and 5y r MA
12%
12%
8%
8%
4%
4%
0%
0%
-4%
-4%
-8%
-8%
-12%
-12%
-16%
-16%
-20%
-20%
-24%
-24%
SEK
0.84
GBP
NZD-USD
0.84
Dec-13
However, there is an external threat which for now
could limit the NZD’s outperformance. The currency
historically has had a high correlation with RORO,
and alongside the AUD and CAD is most likely to
lose out in G10 if there is a renewed bout of ‘risk
off’. Another thing worth highlighting is that from
the valuation standpoint, the deviation of the NZD
REER from its 5yr moving average indicates that the
NZD is currently around 11% overvalued (Chart 2).
This measure also suggests that the NZD is more
overvalued than any other currency in the G10
space. As a result, given caution on the risk front in
the markets and significant overvaluation we expect
the NZD to stay range-bound in the medium-term.
NZD
1. NZD has been choppy so far in 2014
currency, the central bank flagged that interest rates
will need to rise and that they expect to ‘start the
adjustment soon’. The market is currently pricing a
25bps rate hike to be delivered in March, and an
additional 50bps by the end of the year. The NZD
continues to be a carry currency and, therefore,
higher interest rate expectations should help support
the currency. Moreover, as Cash Rate starts to rise
we should see this link strengthen further.
abc
Macro
Currency Strategy
February 2014
G10 at a glance
CHF
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
1.8
1.6
1.4
1.2
1.0
0.8
EUR- CHF (LHS)
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
0.6
USD- CHF (RHS)
Switzerland: Constrained by the floor and EM worries
 The CHF regained some of its allure as a safe haven amid the
renewed concerns about emerging market FX early in 2014.
Its behaviour reinforces our view that EUR-CHF will struggle to
deviate far from 1.25, constrained on the downside by the
EUR-CHF floor, and to the topside by periodic bouts of
nervousness in global markets.
 The stabilisation in Eurozone peripheral bond markets should
provide some upward impetus to EUR-CHF but this story may
already have run its course, with spreads to bunds showing
signs of stabilisation over the last few weeks rather than
additional tightening.
 The lacklustre growth backdrop in the Eurozone is unlikely to
encourage Swiss investors to move capital out of Switzerland, a
pre-condition for any meaningful rally in EUR-CHF. The threat of
ECB policy easing will also cap EUR-CHF topside.
Source: Bloomberg
EUR-NOK
8.5
8.0
8.0
7.5
7.5
7.0
7.0
Jan-13
Jan-14
8.5
Jan-11
Jan-12
9.0
Jan-09
Jan-10
9.5
9.0
Jan-07
Jan-08
9.5
Jan-05
Jan-06
10.0
Jan-03
Jan-04
10.5
10.0
Jan-02
10.5
Norway: More stable, but risk-off mood is a headwind
 The NOK has begun to stabilise lately, but concerns about the
cyclical slowdown and low FX liquidity remain a potent offset to
the currency’s strong structural fundamentals.
 Norway’s mainland economy is expected to outpace most of
Europe’s in 2014, interest rates remain higher than its trading
peers and inflation is high enough to suggest interest rate cuts
are unlikely. However, the recent run of data has been generally
softer than expected, meaning growth expectations are on the
retreat, despite being relatively high compared to other countries.
 The NOK is also increasingly behaving like a “risk on” currency,
as fears about its low level of liquidity means periods of unease
are a headwind to NOK gains. Ultimately, we believe the
combination of strong, albeit slowing, Norwegian growth and the
very healthy current and fiscal surpluses will allow NOK to rally
against a EUR which we expect to be undermined by future
ECB easing.
Source: Bloomberg
EUR-SEK
Jan-13
Jan-14
Jan-11
Jan-12
Jan-09
Jan-10
Jan-07
Jan-08
Jan-05
Jan-06
Jan-03
Jan-04
12.0
11.6
11.2
10.8
10.4
10.0
9.6
9.2
8.8
8.4
8.0
Jan-02
12.0
11.6
11.2
10.8
10.4
10.0
9.6
9.2
8.8
8.4
8.0
Sweden: Further strength ahead
 The SEK has stabilised so far in 2014, and we expect the
currency to strengthen later in the year.
 For now, the Riksbank’s focus is on the low level of inflation
rather than the early signs that activity may have bottomed in the
Swedish economy. The resultant dovish rhetoric will make it
hard for the currency to strengthen in a marked way until the
disinflation threat has receded. In addition, the Finance Ministry
has recently emphasised that a weaker SEK would be beneficial
in promoting exports, thereby reducing the reliance on
consumption and the associated surge in house prices.
 Nonetheless, we also do not expect any further weakness in the
SEK as we believe the rate cutting cycle is already complete and
the central bank’s dovishness is in the price. GDP growth
expectations for 2014 have held steady at 2.4% for 2014, and
both the PMI manufacturing and PMI services indices remain
consistent with accelerating activity.
Source: Bloomberg
27
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Macro
Currency Strategy
February 2014
Asia – regional overview
It has been a lacklustre start to the year for Asian
currencies. Even with softer US Treasury yields,
Asian currencies have been unable to deliver a
decent "New Year rally", unlike in previous years.
This price action is concerning and points to the
challenging path for most of the region's
currencies this year. The structurally sounder
nature of North Asian currencies should still see
them outperform their regional peers through the
course of 2014. But the risks are rising that even
these could lose some of their shine.
Our base case scenario has been that regional
differentiation amongst Asian currencies would
prevail. This is based on the idea that the North
Asian countries' balance of payments is better and
the KRW and TWD are comparatively cheaper on
long-term valuation measures. The RMB is on a
slightly different path but should remain
relatively strong as well, supported by high real
interest rates and FX policy, despite some signs of
being overvalued.
The rest of Asian FX (INR and the ASEAN
currencies) have also, for the most part, traded
disappointingly, especially taking into account the
lack of a meaningful rally after the softer US
payrolls data and the fact that Q1 is usually a
period where higher yielding and higher beta
currencies outperform in Asia.
That fact that the likes of the INR and IDR have only
been able to tread water versus the USD is a
concern. As for ASEAN currencies such as the
MYR, PHP and SGD, we continue to view their
ongoing softness as a reflection of their negative real
rate backdrops. For the THB, while external
balances have been stabilizing somewhat, uncertain
local political situation will continue to pose a
challenge, though central bank activity will likely
curb any aggressive movements in the currency.
28
But while we still think this divergence between
North Asia and Southern Asia will persist through
2014, it is also worth considering what could
make us alter our view. That is: what could make
us think that North Asian currencies will
materially underperform those in the South?
Some key possible developments would include:
 Significant JPY depreciation and the FX
policy response in North Asia
 The impact of slower Chinese demand
 Higher US Treasury yield leading to greater
outward investments and potentially less FX
hedges from Korea and Taiwan
 Tighter monetary policies in Southern Asia
and possibly a faster deleveraging process
 Better valuation in Southern Asian FX or
other local assets
 The possibility of a broader USD rally,
especially in G10, whereby all Asian currencies
would underperform to a similar degree
For more details please see Asian FX Focus: What
would make us think differently?, 28 January 2014
and Asian FX Focus: 2014 outlook: Survival of
the fittest, 8 January 2014.
abc
Macro
Currency Strategy
February 2014
Asia at a glance
USD-CNY
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
8.4
8.2
8.0
7.8
7.6
7.4
7.2
7.0
6.8
6.6
6.4
6.2
6.0
Jan-05
8.4
8.2
8.0
7.8
7.6
7.4
7.2
7.0
6.8
6.6
6.4
6.2
6.0
China (CNY): Holding up
 The RMB has started the year on a stronger footing than most
of its regional peers. The currency continues to stay supported
by high interest rates, a policy preference for a stable currency
and a resilient current account surplus.
 As none of these factors are likely to change in the near term,
we see USD-CNY ending 2014 at 5.98. The current account
surplus is likely to remain sizable, although seasonality
suggests that trade surplus is typically much smaller in Q1. In
addition interest rate liberalization will likely keep respective
interest rates elevated and continue to attract inflows. Stable
currency will still be preferred, although recent comments
suggest greater willingness to adapt to market forces.
 We believe bold FX reforms are needed to reduce the onesided appreciation pressures on the CNY and create greater
RMB volatility. RMB internationalisation will accelerate in 2014,
suggesting the path towards currency convertibility will quicken.
Source: Bloomberg
USD-CNH
6.80
6.70
6.60
6.50
6.40
6.30
6.20
6.10
6.00
Aug-10
Nov-10
Feb-11
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
6.80
6.70
6.60
6.50
6.40
6.30
6.20
6.10
6.00
China (CNH): A plan for Shanghai
 On 2 December 2013, the PBoC published a proposal for the
Shanghai Free Trade Zone (FTZ) which opened a number of new
channels for broader cross-border flows.
 Residents of the FTZ can set up free trade accounts (FTA)
denominated in both CNY and foreign currencies, and non-residents
are allowed to set up non-resident free trade accounts (NFTA).
Transactions between these accounts and offshore accounts are
free. Transactions between FTAs and onshore accounts are treated
as cross-border. A number of other earlier restrictions will also be
liberalised including with regards to cross-border lending and
investments (see China: It's now official: Beijing is accelerating the
pace of RMB convertibility, 3 December 2013 for full details).
 We continue to expect a quick pace of FX internationalisation and
liberalisation in 2014.
Source: Bloomberg
USD-MYR
4.8
4.8
4.4
4.4
4.0
4.0
3.6
3.6
3.2
3.2
2.8
2.8
2.4
2.4
97
99
01
03
05
07
09
11
13
Malaysia: Lingering concerns
 As a result of a smaller current account surplus, the deterioration of
MYR’s FX cover has been significant in recent years. Quarterly
current account surpluses have declined from over USD20bn two
years ago to less than USD10bn now. But just as important has
been an ongoing widening of the income deficit. This has left the
currency vulnerable to the reversal/FX hedging of capital flows.
 The removal of fuel and sugar subsidies, whilst positive for the fiscal
outlook, has resulted in higher inflation pressures since late 2013.
As the BNM has opted for a wait and see mode, onshore real rates
are now in slightly negative territory. This could hurt the MYR via
either FX hedging or foreign investors trimming onshore positions.
 The liquid nature of the onshore FX and bond markets and relative
ease of market access means that the MYR will continue to be
sensitive to cautious sentiment towards EM. The less interventionist
nature of the BNM also means that MYR will remain volatile with
bias towards depreciation in 2014.
Source: Bloomberg
29
abc
Macro
Currency Strategy
February 2014
Asia at a glance continued
USD-INR
70
66
62
58
54
50
46
42
38
34
70
66
62
58
54
50
46
42
38
34
97
99
01
03
05
07
09
11
13
India: Past the worst
 Since late 2013, India’s trade deficit has narrowed significantly
and the outlook for the current account deficit is improving. The
RBI has stood by its pledge and raised policy rate by another
25bps in January. A panel recommendation to formally adopt a
CPI-targeting regime also raised some hopes.
 Having said this, parliamentary elections (scheduled to take
place before May this year) might make it difficult to see
progress on fiscal prudence and structural reforms. The recent
state elections registered a favourable outcome for the current
opposition and the focus will be if a similar result occurs in the
national election.
 In terms of FX policy, the RBI’s willingness to use pockets of
appreciation to build FX reserves is prudent. While the INR may
have passed the worst, the nature of the capital account is very
portfolio dependent. As a result the currency will remain
sensitive to sudden changes in broad risk dynamics.
Source: Bloomberg
USD-IDR
16000
16000
14000
14000
12000
12000
10000
10000
8000
8000
6000
6000
4000
4000
2000
2000
97
99
01
03
05
07
09
11
13
Indonesia: No easy way out
 The IDR lost nearly 20% against the USD in 2013 and the
fundamentals remain more fragile than most of its peers’.
 As we have been saying for some time, the large income
deficit, driven by equity dividends and bond coupon payments,
has been a significant pressure point for the IDR. These flows
are much harder to tackle as they cannot be easily reduced by
tighter monetary policy or changes to import or export policies.
However, tighter monetary policy may still be needed to calm
investors who are still concerned about inflation although recent
release of Q4 GDP data has showed some signs that domestic
demand is starting to slow. There is a silver lining, however, as
some of the recent trade data has improved.
 We think the IDR will remain the more vulnerable to any
tightness in global liquidity. The legislative election slated for
April 2014 adds further uncertainty with regards the
government and more importantly its policy direction.
Source: Bloomberg
USD-KRW
2000
2000
1800
1800
1600
1600
1400
1400
1200
1200
1000
1000
800
800
97
99
Source: Bloomberg
30
01
03
05
07
09
11
13
South Korea: Temporary weakness
 The KRW started the year with more pronounced weakness
than we have expected, even though we have noted the
tendency of a less supportive current account surplus in Q1.
 We think several factors have led to the currency’s recent
underperformance. After a period of sustained appreciation by
the KRW, markets are now taking the opportunity of a reversal
in equity flows (-USD2.4bn year to date) and weaker BoP
seasonality to adjust positions. More importantly, higher
frequency data out of China has been less positive, which has
led to concerns over impact on Korea’s exports and growth.
 Having said that, we still think the currency’s underperformance
is likely to be temporary. We still expect solid fundamentals to
help the currency outperform its regional peers this year. The
sharp reduction in external liabilities after the financial crisis has
made the currency much more resilient to tighter USD liquidity
than others in the region.
abc
Macro
Currency Strategy
February 2014
Latam– regional overview
Room to differentiate
The start of this year has been characterized by
continued outflows of capital from EM that have
accelerated as a result of a cocktail of poor
political and economic events. Political tensions
in Thailand and Ukraine were compounded by
weaker than expected data from China and the
US, as well as the Argentine central bank’s
decision to allow the ARS to depreciate 15% last
month. Beyond the ARS, the worst performer
year-to-date has been the CLP, followed by the
COP, both down around 5%. The MXN and BRL
are only down a little over 2% while the PEN is
off just 1%.
This broadly fits with our view that the CLP is the
most vulnerable currency in the region, exposed to
declining interest rate differentials, concerns over
domestic tax policy changes, and slowing Chinese
growth. The COP’s fundamentals support a more
stable price action as growth is rebounding and
flows remain resilient, but with the CB still buying
dollars and officials consistently touting the need
for a weaker currency, it will be hard for the COP to
rally unless broader EM sentiment improves.
The MXN and BRL have reasons to outperform
other EM currencies, and we believe this trend
can continue. Mexico offers a strong cyclical
growth story (HSBC 2014 GDP forecast is at
4.1%). Beyond that, the structural reforms enacted
last year bode well for longer-term improvements
in Mexico’s potential growth. A recovery in the
US should also help Mexican exports. We
recently took profit on our long MXN vs CLP
trade after Moody’s upgraded Mexico’s sovereign
debt rating to A3 from Baa1. Meanwhile, we see
the BRL’s pace of depreciation moderating in
2014 and outperforming other EM currencies
based on higher interest rate differentials,
relatively cheap valuations, and steady
intervention from the BCB (USD1bn per week).
While Brazil has many structural problems to
address before we can call an end to the
depreciation trend of the BRL, we still see it
trading more stably in a risk-off period supported
by the factors above and also by how expensive it
is to short.
We expect the PEN to keep outperforming the
region. While Peru’s central bank (BCRP) may
marginally increase its tolerance for a weaker
PEN as its trading partners’ currencies soften,
BCRP is also mindful of the private sector’s
relatively high exposure to USD-held debt.
As such, we expect intervention to continue to
hold USD-PEN around the 2.80-2.83 area.
Finally, our outlook for the ARS is for more
weakness to come. Rapidly dwindling FX
reserves, an appreciating currency on a real,
inflation-adjusted basis, as well as continued
capital outflow pressures, all call for further
weakening of the ARS’s nominal rate vs the USD.
We do not consider it sound for the authorities to
defend the 8.0/USD rate indefinitely due to the
high cost of reserves sales this would require.
Moreover, the lack of nominal anchor (in the
absence of tight fiscal policy) keeps pressures for
a weaker ARS ahead.
31
abc
Macro
Currency Strategy
February 2014
Latin America at a glance
USD-MXN
10.5
9.5
9.5
8.5
8.5
Jan-14
11.5
10.5
Jan-12
Jan-13
11.5
Jan-10
Jan-11
12.5
Jan-09
13.5
12.5
Jan-07
Jan-08
13.5
Jan-05
Jan-06
14.5
Jan-03
Jan-04
15.5
14.5
Jan-02
15.5
Mexico: Moody’s upgrade provides a lift
 We have long argued that the MXN should outperform the rest
of the region’s currencies based on its more attractive growth
and balance of payments metrics. While growth last year was
disappointing, we expect to see a strong rebound this year (our
economists expect GDP growth of 4.1% in 2014), and recent
high frequency data has begun to show signs of improvement.
 Mexico’s better longer-term prospects were also recognised by
the earlier-than-expected ratings upgrade from Moody’s in early
February, taking the country’s foreign currency long term rating
to A3 from Baa1. Moody’s cited the strong structural reform
agenda, improved fiscal outlook and better credit metrics.
 Valuations too are relatively attractive, and we favour buying
the MXN against other currencies in the region, particularly the
CLP, or elsewhere in EM on a relative value basis. We see
room for the MXN to recover to 12.60/USD by year-end.
Source: Bloomberg
USD-CLP
Jan-14
Jan-13
Jan-12
Jan-11
400
Jan-10
400
Jan-09
500
450
Jan-08
500
450
Jan-07
600
550
Jan-06
650
600
550
Jan-05
650
Jan-04
750
700
Jan-03
800
750
700
Jan-02
800
Chile: Under pressure from various fronts
 Our view that the CLP will underperform against both the USD
and the rest of the LatAm currencies has been playing out.
 We believe this underperformance will continue due to: a)
Lower copper prices and subsequent weaker terms of trade; b)
Narrowing of the interest rate differential between the CLP and
USD; and c) Political uncertainties associated with the
proposed changes tax and, possibly, foreign investment
policies. Private sector external debt is also the highest in the
region, at 40% of GDP (double the next highest country, Peru),
which means further CLP weakness could induce more stress
via this channel.
 Going forward we see China economic data – particularly PMIs
– as being the key variable setting CLP sentiment. Slowing
China growth will likely weigh on commodities, weakening
Chile’s terms of trade and putting additional downward
pressure on the CLP. Any further rate cuts could also serve to
undermine the currency.
Source: Bloomberg
USD-ARS
Source: Bloomberg
32
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
Jan-02
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
Argentina: Look for more depreciation
 We remain defensive the ARS directionally but disengaged
from a strategy perspective. As long as policies to control
inflation are not introduced, the risks are for more currency
weakness to come.
 While the timing of the next leg higher in USD-ARS is difficult to
predict, we would be biased to call for a move sooner rather
than later. This is because we think that the current pace of
USD sales by the BCRA is unsustainable. The longer the
central bank tries to defend a stable ARS at 8.0/USD, the
higher the probability we would see another stepped move
higher in USD-ARS.
 At the margin, the government can rely on new regulations to
increase FX supply in the short term, but this would be only a
temporary stop-gap to further depreciation. We have revised
our year-end forecast to ARS10.0/USD from 8.5.
abc
Macro
Currency Strategy
February 2014
EMEA – regional overview
Monetary policy normalisation
Turkey’s and South Africa’s central banks have
raised interest rates in January in the face of
weakening currencies and rising inflation risks.
Other countries such as Hungary and Russia have
been also under severe pressure as the market
started to question the logic of their monetary
policy stance in a context of Fed tapering.
We consider that all countries cannot be put in the
same bucket. In the case of Turkey, The
substantive tightening of monetary policy and the
steps towards a more orthodox framework were
required. We believe the sharp increases in rates
are likely to support the TRY. The Turkish central
bank has restored a risk premium, the carry is now
attractive and the high interest rates will support
the much needed macroeconomic rebalancing. It
is worth highlighting that a strong increase in
interest in any form has, historically, led to a
significant and lasting TRY appreciation.
Substantive rate hikes have supported the TRY in previous
periods of TRY weakness
REER
Index
135
Index
135
130
Ov erv aluation
130
125
territory
125
120
120
115
115
110
CBRT hikes 350bp in
110
105
Oc t 11
105
100
CBRT hikes 400bp in Jun 06
95
Jan-05
100
The rate hike in South Africa is more debatable
given the persistence weakness of the economic
activity. The 50bp rate hiked decided in January is
a response to a deterioration of the inflation
outlook but we do not think that macro
fundamentals justify a significant tightening of the
monetary conditions in the upcoming period. If
anything, the rate hike is ZAR positive at the
margin. The FX market may indeed consider the
adjustment of the SARB’s policy is healthy given
an inflation rate foreseen to break the 3-6% target
range in 2014. But for a ZAR stabilisation, a
reduction of the current account deficit remains
the pivotal element. We keep the view it will
materialise in coming quarters leading to a
moderate ZAR appreciation by year-end.
In Hungary, the accommodative monetary policy
and the bias of the central bank to reduce rates
further are under market scrutiny and explain
partly the recent HUF weakness. Although we
consider that the depreciation relatively to macro
fundamentals is excessive, the HUF may remain
under pressure in the near-term if the ‘monetary
policy normalisation’ remains a market theme.
Similarly, the sharp RUB weakening raised the
question of possible rate hikes whilst the Russian
central bank said that it has no intention to scrap the
RUB basket corridor before 2015. We do not see a
hike and retain our directional RUB-bearish view
although a consolidation is possible in the near-term.
95
Jan-07
Jan-09
Jan-11
Jan-13
Source: HSBC, Bloomberg
33
abc
Macro
Currency Strategy
February 2014
EMEA at a glance
USD-TRY
Jan-14
Jan-13
1.1
Jan-12
1.1
Jan-11
1.3
Jan-10
1.5
1.3
Jan-09
1.5
Jan-08
1.7
Jan-07
1.9
1.7
Jan-06
2.1
1.9
Jan-05
2.1
Jan-04
2.3
Jan-03
2.5
2.3
Jan-02
2.5
Turkey: Central Bank sharply raised its interest rates
 The Central Bank of Turkey (CBRT) sharply raised interest
rates after an interim meeting on 28 January. They also took a
step towards simplifying the policy mix, stating that the majority
of funding to the banking sector will now be provided via the
one-week repo rate of 10.0%, instead of via the overnight
lending rate.
 The substantive tightening and the steps towards a more
orthodox policy framework is a crucial change for the FX
market, in our view. The re-pricing of political risk amid a lack of
action from the CBRT had created a vicious cycle for the TRY.
 In the near-term, there are still persistent domestic and global
risks. However, in the medium-term the change in the monetary
policy is likely to support the TRY. Tighter monetary policy will
contribute to the re-balancing of the economy. The high carry
can also no longer be overlooked. It is also worth adding that in
the past such a sharp rise in interest rates has led to a
significant FX appreciation in the following months.
Source: Bloomberg
USD-ZAR
Jan-14
Jan-13
5
Jan-12
6
5
Jan-11
6
Jan-10
7
Jan-09
8
7
Jan-08
8
Jan-07
9
Jan-06
10
9
Jan-05
11
10
Jan-04
11
Jan-03
12
Jan-02
12
South Africa: Towards a monetary policy normalisation?
 The South African central bank unexpectedly hiked its policy
rate by 50bps in January. The Governor G. Marcus justified the
hike by a deteriorating inflation outlook but also the need to
normalise the monetary policy, while the Fed started to reduce
its asset purchases.
 One of the important variables behind the recent upward
revision of SARB’s inflation projections is the ZAR weakness.
The SARB seems to believe that the ZAR may weaken further,
leading eventually to higher inflation.
 Fundamentally, we do not think that much higher rates are
required given the persistent weakness of economic activity.
However, steps towards ‘monetary policy normalisation’ could
be another way in a combination with a competitive currency to
re-balance the economy. Ultimately, that should lead to a
moderate FX appreciation.
Source: Bloomberg
EUR-PLN
Source: Bloomberg
34
Jan-14
Jan-13
3.0
Jan-12
3.0
Jan-11
3.4
Jan-10
3.4
Jan-09
3.8
Jan-08
3.8
Jan-07
4.2
Jan-06
4.2
Jan-05
4.6
Jan-04
4.6
Jan-03
5.0
Jan-02
5.0
Poland: A good barometer of market sentiment vis-à-vis EM
 The Polish zloty has been rather resilient to the recent turmoil
in emerging markets. From macro fundamental standpoint, the
PLN has no reason to weaken, rather the opposite.
 We stay on constructive on the PLN and keep our year-end
forecast of 3.90 for EUR-PLN. If the PLN was to weaken
significantly in the upcoming period, it would be for other
reasons than for macro fundamental issues. The main threat to
the PLN is related to the global capital flows dynamics to
emerging markets. A sustained and profound reallocation of
capital from EM to developed economies would certainly hurt
the PLN. Poland has been one of the largest beneficiaries of
capital flows to EM in recent years.
 Hence, we consider that the PLN is a good barometer of
investors’ sentiment vis-à-vis emerging markets.
abc
Macro
Currency Strategy
February 2014
HSBC Volume-Weighted REERs
For full details of the construction methodology of
the HSBC REERs, please see “HSBC’s New
Volume-Weighted REERs” Currency Outlook
April 2009.
The value of a currency
Since FX prices are always given as the amount of
one currency that can be bought with another, the
inherent value of a currency is not defined.
For example, if EUR-USD goes up, this could be
because the EUR has increased in value, the USD
has decreased in value, or a combination of both.
One possible method for getting some insight into
changes in the value of a currency is to look at
movements in the value of a basket of other
currencies against the currency of interest. For
example, if EUR-USD increased over some time
period, one could see how EUR had performed
against a range of other currencies to determine
whether EUR has become generally more valuable
or whether this was simply a USD-based move. An
effective exchange rate is an attempt to do this and to
represent the moves in index form.
There are two main approaches to building an
effective exchange rate: Nominal Effective
Exchange Rates (NEERs) and Real Effective
Exchange Rates (REERs). NEERs simply track
the weighted average returns of a basket of other
currencies against the currency being investigated;
REERs deflate the returns in an attempt to
compensate for the differing rates of inflation in
different countries. The reason for doing this is
that, particularly over long time frames, inflation
can have a large impact on the purchasing power
How should we weight
the basket?
If we are trying to create an index for the change
in value of a currency against a basket of other
currencies, we now need to decide on how to
weight our basket. One possible solution would be
to simply have an equally-weighted basket.
The rationale for this would be that there is no a
priori reason for choosing to put more emphasis
on any one exchange rate. However, this could
clearly lead to the situation where a large move in
Mark McDonald
FX Strategist
HSBC Bank plc
+44 20 7991 5966
[email protected]
a relatively small currency can strongly influence
the REERs and NEERs for all other currencies.
To avoid this, the indices are generally weighted
so that more “important” currencies get higher
weighting. This, of course, begs the question of
how “importance” is defined.
Trade Weights
Weighting the basket by bilateral trade-weights is
the most common weighting procedure for
creating an effective exchange rate index. This is
because the indices are often used to measure the
likely impact of exchange rate moves on a
country’s international trade performance.
Volume Weights
The daily volume traded in the FX market
dwarves the global volume of physical trade.
From this it is possible to make a convincing
argument that the weighting which would be
really important would be to weight the currency
basket by financial market flows, rather than
bilateral trade.
of a currency.
35
abc
Macro
Currency Strategy
February 2014
To do this properly would require us to have
accurate FX volumes for all currency pairs
considered in the index. However, these are not
available. The BIS triennial survey of FX volumes
only gives data for a small number of bilateral
exchange rates. However, the volumes are split by
currency for over 30 currencies. From these
volumes we can estimate financial weightings for
each currency. We believe that this gives another
plausible definition for “importance”, and one
which may be more relevant for financial
investors than trade weights. We call this
procedure volume weighting and the indices
produced through this procedure we call the
HSBC volume-weighted REERs.
We would argue that if you are a financial market
investor, the effective value of a currency you
would be exposed to is more accurately
represented by the HSBC volume-weighted index
rather than the trade-weighted index.
36
Data Frequency
This is something which is rarely considered
when constructing REERs – inflation data is
generally released at monthly frequency at best so
the usual procedure is to simply create monthly
indices by default. However, some countries
release their inflation data only quarterly. The
usual procedure for these countries is to simply
pro-rata the change over the period. Here there is
an implicit assumption that the rate of inflation
changes slowly. We take this assumption one step
further and assume that it is valid to spread the
inflation out equally over every day in the month.
abc
Macro
Currency Strategy
February 2014
HSBC Volume – Weighted REERs
USD REER index
EUR REER index
USD Trade-Weighted REER
EUR Volume-Weighted REER
USD Volume-Weighted REER
1996=100
160
1996=100
160
140
140
120
120
100
100
80
80
Jul-95
Jul-98
Jul-01
Jul-04
Jul-07
Jul-10
Jul-13
120
120
110
110
100
100
90
90
80
80
70
70
60
60
Jul-95
Jul-98
Source: HSBC
Source: HSBC
JPY REER index
GBP REER index
JPY Trade-Weighted REER
JPY Volume-Weighted REER
1996=100
120
1996=100
120
Jul-01
Jul-04
GBP Trade-Weighted REER
1996=100
140
Jul-07
Jul-10
Jul-13
GBP Volume-Weighted REER
1996=100
140
130
130
120
120
110
110
100
100
90
90
105
105
90
90
75
75
60
60
Jul-95
EUR Trade-Weighted REER
1996=100
1996=100
Jul-98
Source: HSBC
Jul-01
Jul-04
Jul-07
Jul-10
Jul-13
80
Jul-95
80
Jul-98
Jul-01
Jul-04
Jul-07
Jul-10
Jul-13
Source: HSBC
37
abc
Macro
Currency Strategy
February 2014
CAD REER index
CHF REER index
CAD Trade-Weighted REER
150
CAD Volume-Weighted REER
1996=100
150
130
130
140
140
120
120
130
130
110
110
120
120
100
100
110
110
90
90
100
100
80
80
90
90
70
70
80
60
1996=100
80
Jul-95
Jul-98
Jul-01
Jul-04
Jul-07
Jul-10
Jul-95
Jul-13
Source: HSBC
AUD Volume-Weighted REER
1996=100
160
60
Jul-98
Jul-01
Jul-04
NZD Volume-Weighted REER
1996=100
160
140
Jul-07
Jul-10
Jul-13
NZD Trade-Weighted REER
1996=100
140
1996=100
140
140
120
120
100
100
80
80
60
60
Jul-98
Jul-01
Jul-04
Jul-07
Jul-10
100
100
80
80
60
60
Jul-98
Jul-01
Jul-04
Jul-07
Jul-10
Jul-13
NOK REER index
SEK Trade-Weighted REER
SEK Volume-Weighted REER
1996=100
110
NOK Trade-Weighted REER
1996=100
110
100
100
90
90
80
80
70
70
60
60
Source: HSBC
120
Source: HSBC
SEK REER index
Jul-98
120
Jul-95
Jul-13
Source: HSBC
38
1996=100
NZD REER index
AUD Trade-Weighted REER
Jul-95
CHF Trade-Weighted REER
Source: HSBC
AUD REER index
Jul-95
CHF Volume-Weighted REER
1996=100
Jul-01
Jul-04
Jul-07
Jul-10
Jul-13
NOK Volume-Weighted REER
1996=100
130
1996=100
130
120
120
110
110
100
100
90
90
80
80
70
Jul-95
70
Jul-98
Source: HSBC
Jul-01
Jul-04
Jul-07
Jul-10
Jul-13
abc
Macro
Currency Strategy
February 2014
HSBC forecasts vs forwards
EUR-USD vs forwards
EUR-CHF vs forwards
EUR-USD
1.60
Forward
EUR-USD
1.60
Forecast
EUR-CHF
Forward
EUR-CHF
Forecast
1.50
1.70
1.70
1.40
1.40
1.60
1.60
1.30
1.30
1.50
1.50
1.20
1.20
1.40
1.40
1.10
1.10
1.30
1.30
1.20
1.20
1.10
1.10
1.50
1.00
1.00
0.90
0.90
0.80
Jan-00
0.80
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
1.00
Jan-00
Jan-14
1.00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Source: Thomson Financial Datastream, Reuters, HSBC
Source: Thomson Financial Datastream, Reuters, HSBC
GBP-USD vs forwards
EUR-GBP vs forwards
GBP-USD
2.10
Forward
GBP-USD
2.10
Forecast
EUR-GBP
1.00
Forward
Jan-12
Jan-14
EUR-GBP
1.00
Forecast
2.00
2.00
0.95
0.95
1.90
1.90
0.90
0.90
0.85
0.85
0.80
0.80
0.75
0.70
1.80
1.80
1.70
1.70
1.60
1.60
0.75
0.70
1.50
1.50
0.65
0.65
1.40
1.40
0.60
0.60
1.30
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
1.30
0.55
Jan-00 Jan-02 Jan-04
0.55
Jan-06 Jan-08
Jan-10
Source: Thomson Financial Datastream, Reuters, HSBC
Source: Thomson Financial Datastream, Reuters, HSBC
USD-JPY vs forwards
EUR-JPY vs forwards
Forward
USD-JPY
Forecast
USD-JPY
140
140
130
130
120
120
110
110
100
100
90
90
80
80
70
70
60
Jan-00
60
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Source: Thomson Financial Datastream, Reuters, HSBC
Jan-12
Jan-14
EUR-JPY
Forward
Jan-12
Jan-14
EUR-JPY
Forecast
175
165
175
165
155
145
155
145
135
125
135
125
115
105
115
105
95
85
Jan-00
95
85
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Source: Thomson Financial Datastream, Reuters, HSBC
39
abc
Macro
Currency Strategy
February 2014
Short rates
3 M on th M o ney
en d perio d
N o rth A m er ica
x
x
L atin A m erica
x
x
x
W estern Eu ro p e
Eur oz on e
Oth er W estern Eu ro p e
x
x
x
EM EA
A sia/Pacific
x
x
x
2010
Q4
x
0.3
1.2
x
4.6
11.1
3.3
x
0.9
x
0.8
2.6
1.8
0.2
2011
Q4
2012
Q4
2013
Q3
Q4
2014
Q1f
Q2f
Q3f
Q4f
x
U S (U SD)
C anada (C AD)
x
M ex ic o (M XN )
Braz il (BR L)
C hile (C LP)
x
x
x
U K (GBP)
N orw ay (N OK)
Sw eden (SEK)
Sw itz erland (C HF)
2009
Q4
x
0.3
0.5
x
5.5
8.7
0.5
x
0.7
x
0.6
2.2
0.5
0.3
0.5
1.4
x
4.4
10.4
5.1
x
1.3
x
1.1
2.9
2.7
0.1
0.4
1.3
x
4.4
7.1
4.9
x
0.1
x
0.5
1.9
1.6
0.0
0.2
1.2
x
3.7
9.4
4.8
x
0.1
x
0.5
1.7
1.2
0.0
0.2
1.2
x
3.9
10.3
4.3
x
0.3
x
0.5
1.7
1.0
0.0
0.3
1.2
x
3.9
10.5
4.1
x
0.2
x
0.6
1.7
1.0
0.0
0.3
1.2
x
3.9
10.5
4.1
x
0.2
x
0.6
1.7
1.0
0.0
0.3
1.2
x
4.0
10.5
4.1
x
0.2
x
0.6
1.8
1.0
0.0
0.3
1.2
x
4.2
11.0
4.1
x
0.2
x
0.7
1.8
1.1
0.0
Hungary (HU F )
Poland (PLN )
R uss ia (R U B)*
T urk ey (TR Y)
U k raine (U AH)
South Afric a (Z AR )
x
J apan (J PY)
Aus tralia (AU D)
N ew Z ealand (N Z D)
6.0
4.2
6.6
7.5
16.1
7.1
x
0.3
4.0
2.8
5.9
4.0
4.1
6.7
9.1
5.5
x
0.2
5.0
3.2
7.2
5.0
6.4
10.1
21.5
5.5
x
0.2
4.5
2.7
5.8
4.1
7.5
5.5
18.3
5.2
x
0.2
3.0
2.6
3.6
2.7
6.8
6.9
18.3
5.4
x
0.2
2.6
2.7
3.0
2.7
6.9
7.8
12.3
5.2
x
0.1
2.6
2.7
2.8
2.7
6.7
9.5
10.3
5.2
x
0.2
2.6
3.0
2.8
2.7
6.8
9.5
9.3
5.1
x
0.2
2.6
3.2
2.8
2.7
6.6
9.5
9.3
5.1
x
0.2
2.9
3.3
2.9
2.7
6.4
9.5
9.3
5.1
x
0.2
3.1
3.4
C hina (C N Y)
Hong Kong (HKD)
T aiw an (T WD)
South Korea (KR W)
1.7
0.5
0.5
2.8
2.3
0.3
0.7
2.8
3.1
0.4
0.9
3.6
2.6
0.4
0.9
2.9
2.6
0.4
0.9
2.7
2.6
0.4
1.1
2.7
2.6
0.5
1.1
2.7
2.6
0.5
1.5
2.7
2.6
0.5
1.1
2.8
2.6
0.5
1.5
3.0
India (IN R )
Indonesia (IDR )
M alay sia (M YR )
Philippines (PHP)
Singapore (SGD)
T hailand (T HB)
x
South Afric a (Z AR )
4.6
7.1
2.2
3.9
0.7
1.4
x
7.1
9.0
6.6
3.0
0.8
0.4
2.2
x
5.5
9.8
5.3
3.2
1.6
0.4
3.2
x
5.5
8.2
5.0
3.2
0.6
0.4
2.9
x
5.2
9.7
7.2
3.2
0.5
0.4
2.6
x
5.4
9.2
7.6
3.2
0.5
0.4
2.4
x
5.2
8.7
7.7
3.3
0.6
0.4
2.3
x
5.2
9.5
7.8
3.4
0.6
0.4
2.4
x
5.1
8.0
7.8
3.5
0.6
0.4
2.5
x
5.1
7.7
7.8
3.7
0.6
0.4
2.6
x
5.1
N orth Asia
x
x
x
South As ia
x
x
x
x
x
A frica
x
N o tes: * 1-m o nth m o ney. So urc e: H SB C
Important note
This table represents three month money rates. Due to the dislocation in the three month money markets, these rates may not give a
good indication of policy rates.
40
abc
Macro
Currency Strategy
February 2014
Emerging markets forecast table
Latin America vs USD
x
13-Feb-14
2013
last
Q3
Q4
Q1f
Q2f
Q3f
Q4f
Q1f
Q2f
Q3f
Q4f
x
x
x
x
x
x
x
x
x
x
x
x
2014
2015
Argentina (ARS)
7.81
5.79
6.50
8.00
8.50
9.25
10.00
10.75
11.50
12.20
12.90
Brazil (BRL)
2.43
2.23
2.36
2.35
2.40
2.45
2.50
2.52
2.55
2.58
2.60
Chile (CLP)
552
505
525
530
535
540
545
550
550
550
550
Mex ico (MXN)
13.37
13.17
13.00
12.90
12.80
12.70
12.60
12.60
12.60
12.60
12.60
Colombia (COP)
2031
1828
1923
1935
1940
1950
1960
1970
1980
1990
2000
Peru (PEN)
2.82
2.79
2.80
2.80
2.80
2.75
2.75
2.75
2.75
2.75
2.75
Venezuala (VEF)
6.29
6.29
6.30
15.00
15.00
15.00
15.00
15.00
15.00
15.00
15.00
Czech Republic (CZK)
27.5
25.7
27.0
27.0
27.0
27.0
27.0
26.8
26.5
26.0
26.0
Hungary (HUF)
312
297
300
295
295
290
290
290
290
290
290
Russia v s USD (RUB)
35.0
32.3
32.9
33.5
34.7
34.8
35.4
36.1
37.6
37.1
37.3
Romanian (RON)
4.49
4.40
4.50
4.40
4.35
4.30
4.30
4.30
4.30
4.30
4.30
Turkey v s USD (TRY)
2.20
2.02
2.15
2.30
2.20
2.15
2.10
2.15
2.15
2.00
2.00
4.18
4.23
4.20
4.10
4.00
4.00
3.90
3.90
3.90
3.90
3.90
Eastern Europe vs EUR
Simple rate
Poland (PLN)
x
x
x
x
x
x
x
x
x
x
Egy pt (EGP)
6.96
x
7.00
6.95
6.80
6.80
7.00
7.00
7.35
7.35
7.35
7.35
Israel (ILS)
3.51
3.55
3.50
3.60
3.55
3.55
3.50
3.50
3.50
3.50
3.50
11.08
10.06
10.60
10.60
10.60
10.40
10.40
10.00
10.00
10.00
10.00
Middle East vs USD
x
Africa vs USD
South Africa (ZAR)
Interest rates
Source: HSBC
41
abc
Macro
Currency Strategy
February 2014
Exchange rates vs USD
end period
2010
Q4
2011
Q4
2012
Q4
2013
Q3
2014
Q1f
Q4
Q2f
Q3f
2015
Q1f
Q4f
Q2f
Q3f
Q4f
Americas
x
x
Canada (CAD)
0.99
1.02
1.00
1.03
1.06
1.12
1.13
1.15
1.15
1.15
1.15
1.15
1.15
x
Mex ico (MXN)
12.36
13.97
12.87
13.17
13.00
12.90
12.80
12.70
12.60
12.60
12.60
12.60
12.60
x
Brazil (BRL)
1.67
1.88
2.04
2.23
2.36
2.35
2.40
2.45
2.50
2.52
2.55
2.58
2.60
x
x
Argentina (ARS)
3.97
4.30
4.92
5.79
6.50
8.00
8.50
9.25
10.00
10.75
11.50
12.20
12.90
Western Europe
x
x
Eurozone (EUR*)
Other Western Europe x
x
1.34
x
x
1.30
x
x
1.32
x
x
1.35
x
x
1.37
x
x
1.35
x
x
1.33
x
x
1.30
x
x
1.28
x
x
1.25
x
x
1.25
x
x
1.25
x
1.25
x
x
UK (GBP*)
1.57
1.55
1.63
1.62
1.66
1.65
1.61
1.55
1.50
1.47
1.47
1.47
1.47
x
Sw eden (SEK)
6.72
6.86
6.51
6.42
6.47
6.52
6.47
6.46
6.48
6.56
6.56
6.56
6.56
x
Norw ay (NOK)
5.81
5.97
5.57
6.01
6.10
6.15
6.09
6.00
5.94
5.92
5.92
5.92
5.92
x
x
Sw itzerland (CHF)
0.93
0.94
0.92
0.90
0.90
0.93
0.94
0.96
0.98
1.00
1.00
1.00
1.00
Em erging Europe
x
x
Russia (RUB)
30.5
32.0
30.5
32.3
32.9
33.5
34.7
34.8
35.2
36.1
37.6
37.1
37.3
x
Poland (PLN)
2.95
3.43
3.09
3.12
3.07
3.04
3.01
3.08
3.05
3.12
3.12
3.12
3.12
x
Hungary (HUF)
207
242
221
220
219
219
222
223
227
232
232
232
232
x
x
Czech Republic (CZK)
18.7
19.6
19.0
19.0
19.7
20.0
20.3
20.8
21.1
21.4
21.2
20.8
20.8
Asia/Pacific
x
x
Japan (JPY)
x
Australia (AUD*)
x
x
New Zealand (NZD*)
North Asia
x
x
x
x
x
x
x
x
x
x
x
x
x
81
77
86
98
105
106
103
103
101
99
99
99
99
1.03
1.03
1.04
0.94
0.90
0.89
0.88
0.87
0.86
0.86
0.86
0.86
0.86
0.78
x
0.78
x
0.83
x
0.83
x
0.83
x
0.84
x
0.85
x
0.86
x
0.87
x
0.88
x
0.88
x
0.88
x
0.88
x
x
China (CNY)
6.59
6.29
6.23
6.12
6.05
6.04
6.02
6.00
5.98
5.96
5.94
5.92
5.90
x
Hong Kong (HKD)
7.77
7.77
7.75
7.76
7.76
7.80
7.80
7.80
7.80
7.80
7.80
7.80
7.80
x
Taiw an (TWD)
30.4
30.3
29.0
29.6
29.8
30.3
30.2
30.0
29.8
29.7
29.6
29.5
29.4
x
x
South Korea (KRW)
1121
1159
1064
1075
1053
1040
1035
1030
1025
1020
1015
1010
1000
South Asia
x
x
x
x
x
x
x
x
x
x
x
x
x
x
India (INR)
44.7
53.0
55.0
62.6
61.9
61.0
61.0
62.0
62.0
63.0
63.0
64.0
64.0
x
Indonesia (IDR)
9010
9068
9638
11580
12170
11750
12000
12250
12500
12500
12500
12500
12500
x
Malay sia (MYR)
3.08
3.17
3.06
3.26
3.28
3.25
3.28
3.30
3.33
3.35
3.35
3.35
3.35
x
Philippines (PHP)
43.6
43.8
41.1
43.5
44.4
44.5
44.8
45.0
45.2
45.4
45.4
45.4
45.4
x
Singapore (SGD)
1.28
1.30
1.22
1.26
1.26
1.25
1.26
1.27
1.28
1.28
1.28
1.28
1.28
x
Thailand (THB)
30.1
31.6
30.6
31.3
32.7
33.0
33.3
33.6
34.0
34.3
34.5
34.5
34.5
Vietnam (VND)
19498
21037
20835
21119
21080
21100
21100
21100
21100
21100
21100
21100
21100
Africa
x
x
South Africa (ZAR)
Source HSBC
42
x
x
6.62
x
8.07
x
8.48
x
10.06
x
10.60
x
10.60
x
10.60
x
10.40
x
10.40
x
10.00
x
10.00
x
10.00
10.00
abc
Macro
Currency Strategy
February 2014
Exchange rates vs EUR & GBP
end period
2010
2011
2012
2013
2014
2015
Q4
Q4
Q4
Q3
Q4
Q1f
Q2f
Q3f
Q4f
Q1f
Q2f
Q3f
Q4f
Vs euro
Am ericas
x
x
Europe
x
x
x
x
x
x
x
x
Asia/Pacific
x
x
x
x
x
US (USD)
Canada (CAD)
x
UK (GBP)
Sw eden (SEK)
Norw ay (NOK)
Sw itzerland (CHF)
Russia (RUB)
Poland (PLN)
Hungary (HUF)
Czech Republic (CZK)
x
Japan (JPY)
Australia (AUD)
New Zealand (NZD)
1.34
1.33
1.30
1.32
1.32
1.31
1.35
1.39
1.37
1.45
1.35
1.51
1.33
1.50
1.30
1.50
1.28
1.47
1.25
1.44
1.25
1.44
1.25
1.44
1.25
1.44
0.86
9.02
7.80
1.25
40.9
3.96
278
25.1
x
109
1.31
1.72
0.84
8.90
7.75
1.21
41.6
4.46
315
25.5
x
100
1.27
1.66
0.81
8.58
7.34
1.21
40.2
4.08
291
25.1
x
114
1.27
1.60
0.84
8.69
8.14
1.22
43.8
4.23
297
25.7
x
133
1.45
1.63
0.83
8.86
8.36
1.23
45.1
4.20
300
27.0
x
144
1.52
1.65
0.82
8.80
8.30
1.25
45.3
4.10
295
27.0
x
143
1.52
1.61
0.83
8.60
8.10
1.25
46.2
4.00
295
27.0
x
137
1.51
1.56
0.84
8.40
7.80
1.25
45.2
4.00
290
27.0
x
134
1.49
1.51
0.85
8.30
7.60
1.25
45.3
3.90
290
27.0
x
129
1.49
1.47
0.85
8.20
7.40
1.25
45.2
3.90
290
26.8
x
124
1.46
1.42
0.85
8.20
7.40
1.25
47.1
3.90
290
26.5
x
124
1.46
1.42
0.85
8.20
7.40
1.25
46.4
3.90
290
26.0
x
124
1.46
1.42
0.85
8.20
7.40
1.25
46.7
3.90
290
26.0
x
124
1.46
1.42
Vs sterling
Am ericas
x
x
Europe
x
x
x
x
x
Asia/Pacific
x
x
x
x
x
US (USD)
Canada (CAD)
x
Eurozone (EUR)
x
x
1.57
1.56
x
0.86
x
x
1.55
1.58
x
0.84
x
x
1.63
1.62
x
0.81
x
x
1.62
1.66
x
0.84
x
x
1.66
1.76
x
0.83
x
x
1.65
1.85
x
0.82
x
x
1.61
1.82
x
0.83
x
x
1.55
1.78
x
0.84
x
x
1.50
1.72
x
0.85
x
x
1.47
1.69
x
0.85
x
x
1.47
1.69
x
0.85
x
x
1.47
1.69
x
0.85
x
x
1.47
1.69
x
0.85
10.53
9.10
1.46
x
127
1.53
2.00
10.65
9.27
1.45
x
120
1.52
1.99
10.57
9.05
1.49
x
141
1.57
1.97
10.40
9.74
1.46
x
159
1.73
1.94
10.74
10.13
1.49
x
174
1.84
2.00
10.75
10.14
1.53
x
175
1.85
1.96
10.42
9.82
1.51
x
166
1.83
1.90
10.01
9.29
1.49
x
160
1.78
1.80
9.72
8.90
1.46
x
151
1.74
1.72
9.65
8.71
1.47
x
146
1.71
1.67
9.65
8.71
1.47
x
146
1.71
1.67
9.65
8.71
1.47
x
146
1.71
1.67
9.65
8.71
1.47
x
146
1.71
1.67
Sw eden (SEK)
Norw ay (NOK)
Sw itzerland (CHF)
x
Japan (JPY)
Australia (AUD)
New Zealand (NZD)
Source: HSBC
43
Macro
Currency Strategy
February 2014
Notes
44
abc
Macro
Currency Strategy
February 2014
abc
Notes
45
Macro
Currency Strategy
February 2014
Notes
46
abc
Macro
Currency Strategy
February 2014
abc
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: David Bloom, Daragh Maher, Clyde Wardle, Robert Lynch,
Paul Mackel, Stacy Williams, Marjorie Hernandez, Mark McDonald, Murat Toprak, Dominic Bunning, Ju Wang, Julia Wang,
Karen Ward and James Pomeroy
Important Disclosures
This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the
clients of HSBC and is not for publication to other persons, whether through the press or by other means.
This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer
to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this
document is general and should not be construed as personal advice, given it has been prepared without taking account of the
objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice,
consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek
professional investment and tax advice.
Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may
not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of
the investment products mentioned in this document and take into account their specific investment objectives, financial
situation or particular needs before making a commitment to purchase investment products.
The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an
investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls
in value that could equal or exceed the amount invested. Value and income from investment products may be adversely
affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative
of future results.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives)
of companies covered in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
Additional disclosures
1
2
3
This report is dated as at 13 February 2014.
All market data included in this report are dated as at close 12 February 2014, unless otherwise indicated in the report.
HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
47
Macro
Currency Strategy
February 2014
abc
Disclaimer
* Legal entities as at 8 August 2012
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48
Currency
OUTLOOK
Main contributors
David Bloom
Global Head of FX Research
HSBC Bank plc
+44 20 7991 5969
[email protected]
Stacy Williams
Head of FX Quantitative Strategy
HSBC Bank plc
+44 20 7991 5967
[email protected]
Daragh Maher
FX Strategist, G10
HSBC Bank plc
+44 20 7991 5968
[email protected]
Mark McDonald
FX Quantitative Strategist
HSBC Bank plc
+44 20 7991 5966
[email protected]
Paul Mackel
Head of Asian FX Research
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6565
[email protected]
Robert Lynch
Head of G10 FX Strategy, Americas
HSBC Securities (USA) Inc.
+1 212 525 3159
[email protected]
Ju Wang
FX Strategist, Asia
The Hongkong and Shanghai Banking Corporation Limited
+852 2822 4340
[email protected]
Clyde Wardle
Emerging Markets FX Strategist
HSBC Securities (USA) Inc.
+1 212 525 3345
[email protected]
Dominic Bunning
FX Strategist, Asia
The Hongkong and Shanghai Banking Corporation Limited
+852 2822 1672
[email protected]
Marjorie Hernandez
FX Strategist, Latin America
HSBC Securities (USA) Inc.
+1 212 525 4109
[email protected]
Murat Toprak
FX Strategist, EMEA
HSBC Bank plc
+44 20 7991 5415
[email protected]
Macro
Currency Strategy
February 2014
Why the JPY won’t weaken
Japan’s QE and associated JPY decline has not prompted a retaliatory
currency war within Asia, but the threat to currency peace is growing.
Furthermore, should Japanese exporters succeed in grabbing market
share, we could see an improvement in Japan’s external balance. In
addition, capital flows may act as a support for the JPY, especially
if the JPY’s role as a safe haven continues to be rebuilt.
FX: taking stock of any shock
We examine the performance of global FX during periods of equity
market weakness. Historically, the safe haven USD, JPY and CHF reign
supreme, but EUR and GBP could also gain. At the opposite end of the
G10 scale are the “risk on” currencies, where the CAD would be the
most exposed. In EM FX, all currencies tend to fall against the USD.
It is simply a question of deciding which is the more ugly.
Long-term forecasts
We publish our long-term FX forecasts up to 2020.
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it