“Escalator Up” Part II – Asia 2013 Outlook

Focus: Asia 2013 Outlook - What should we do going forward in 2013? In our first Asia Strategy Focus (22 Oct 2012), we titled it The “Escalator Up” Part, where we expected Asian currencies to slowly appreciate going into 2013. As the economic recovery becomes consensus and reflected in prices, we are advising investing through themes in 2013 whereas 4Q 2012 was a directional call. The three themes we see in 2013 are 1) Trend following (long KRW) 2) Event trades (long MYR) 3) Shift away from fundamentals (long INR, IDR vs. SGD, HKD).
Our CNY strategy is to be short USDCNH 12M and long USDCNY 12M NDF. We prefer CNH over NDF because a) CNH provides positive carry b) we are anticipating a widening in the daily trading band, which will have a bigger impact on the spot referenced markets (CNY onshore and CNH) c) we think the move in fixing will be concentrated towards 2H when the economy and political transition are on a firmer footing and signs of inflation and monetary tightening bias return. The title of this publication has the phrase “Escalator Up” since making profit can be a slow grind but can quickly be erased by “elevator down”. As we enter a more established upward trend and positioning increases, the chances of “elevator down” builds. The US Debt Ceiling negations are can be that catalyst. Hence, we will run with the above themes for the year but will introduce tactical themes towards mid to late February to hedge the 12 month themes outlined above.

MONDAY 14 JANUARY 2013

EDITOR Sean Yokota
Head of Asia Strategy
sean.yokota@seb.se

+65 6505 0583

Asia FX Portfolio – Last week we initiated an Asia FX Portfolio by going long MYR vs. USD. We will build the portfolio over the first quarter to reflect the 2013 themes mentioned above. The trades we are considering to add are 1) Long KRW vs. USD 2) Long INR vs. SGD 3) Long USDHKD 4) Long 12M CNH vs. CNY NDF. We will be publishing Currency Strategy at the end of January led by our Chief Currency Strategist Carl Hammer. From there we will look to diversify our funding away from USD to other G10 currencies. FX Tracker - A look at Asian across asset performance, FX forwards and volatility over the last month. What stands out?
1) Performance – Positive correlation between equity and currency markets continued for the second month lifting Asian assets. However, the G3 FX moves are dwarfing Asian FX movement. China related equity markets performed well and Philippines remains the star performer on equity, bonds and currency. Hawkish Fed minutes have pushed rates higher in Asia and have steepened the curve. Growth related steepening will remain positive for Asia but yield increase from fiscal scare will hurt Asian performance and worth following going forward. Indonesian 5 year bonds continued to fall from canceled bond auctions but yields will again rise in 2013. 2) Forwards – Implied yields continue to fall following spot. Many markets such as CNY, PHP, TWD are pricing in appreciation. IDR and INR still offer attractive positive carry.   3) Volatility - Implied volatility continues to head lower with the exception of MYR, PHP and JPY. JPY remains on an upward trend while EUR vol drops.

You can also find our research materials at our website: www.mb.seb.se. This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted for any director consequential loss resulting from reliance on this document. Changes may be made to opinions or information contained herein without notice.

Asia Strategy Focus

Focus: “Escalator Up” Part II – Asia 2013 Outlook
Summary What should we do going forward in 2013? In our first Asia Strategy Focus (22 Oct 2012), we titled it The “Escalator Up” Part, where we expected Asian currencies to slowly appreciate going into 2013. We saw a cyclical recovery will favour Asian currencies but intervention by central banks will slow the pace of appreciation. Since then, the macro has turned better with improved exports and domestic activity in China and the Asia Dollar Index is up by 74bp or about 5.7% annualized. They are average moves but small compared to the 66% annualized move in USDJPY. As the recovery becomes consensus and reflected in prices, we are advising investing through themes in 2013 whereas 4Q 2012 was about a directional call. The three themes we see in 2013 is 1) Trend following (long KRW) 2) Event trades (long MYR) 3) Shift away from fundamentals (long INR, IDR vs. SGD, HKD). The title of this publication has the phrase “Escalator Up” since making profit can be a slow grind but can quickly be erased by “elevator down”. As we enter a more established upward trend and positioning increases, the chances of “elevator down” builds. The US Debt Ceiling negations are can be that catalyst. Hence, we will run with the above themes for the year but will introduce tactical themes towards mid to late February to hedge the 12 month themes outlined above. Macro backdrop – positive but limited upside surprise We remain positive on the macro outlook for Asia since the two biggest engines, exports and China’s domestic demand remain on a recovery path. As Chart 1 shows, exports have been increasing since late last year after contracting for the first time since the 2008 Global Financial Crisis. And going forward, our favourite leading indicator for Asian exports, Taiwan’s manufacturing survey points to continued recovery in 2013.
Chart 1: Asian exports to continue recovering
70 60 50 40 30 20 10 0 -10 -20 -30 00 01 02 03 04 05 06 07 08 09 10 11 12 13 0 -10 -20 -30 Asia avg Exports YoY % 3mma TIER leading indicator, pushed fwd 6m (RHS) 40 30 20 10

Taiwan’s manufacturing survey has been a reliable indicator for Asian exports since Taiwan manufacturers have small domestic markets and are very sensitive to changes in global demand. For places like China, Korea and Japan, an initial slowdown in US and European demand can be buffered by selling their goods to their large domestic markets and their production reaction is delayed. On the other hand, Taiwan will have to cut production immediately and sentiment is downgraded immediately. An important item to notice on Chart 1 is that although the leading indicator points to a recovery in exports, the strength of the recovery will be mild and hard to see it growing above 10% this year. Furthermore, exports point to some moderation in the first half, which will impact how we position for the shorter time horizon. What about China? We don’t think the new leadership change will lead to massive stimulus or new reforms. Instead, we focus on the construction cycle, which has been the driver of the Chinese domestic economy in the past. Our SEB China construction indicator has reliably showed the upturn in the domestic cycle starting in June of last year and continues to recover (Chart 2). Initially, pick up in infrastructure spending helped construction activity but what will keep the recovery going are small upward rise in property prices and monetary stimulus from non-bank lending.
Chart 2: China’s domestic activity also recovering
50 40 30 20 10 0 -10 -20 07 08 09 10 11 12 % yoy 3mma

SEB China construction indicator

Source: CEIC, SEB

The number of Chinese cities experiencing month on month price increases have been growing since September, which implies that demand is outstripping supply and clearing out inventories. In addition, in places like China where deposit rates remain low (well below inflation), households will again become attracted to moving funds away from deposits to purchasing homes as they see home prices rebounding. Furthermore, as mentioned in our previous publications, non-bank lending continues to grow and is providing monetary stimulus. As Chart 3 shows, bank lending has been lacklustre this year but total financing continues to

Source: CEIC, Taiwan Institute of Economic Research, SEB

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Asia Strategy Focus

grow from other financing channels such as corporate bond market and trust products. As we enter a new year, bank lending should also get its seasonal boost as banks get new annual calendar lending quota and points to further monetary stimulus.
Chart 3: Non bank lending is keeping total financing high
RMB trn 3mma 1.5

story soon. Of course, directionally as we get deeper into recovery, inflation will start rising. A more assured outlook will also reignite investment and the capital expenditure cycle, increase the demand for loans at these low interest rates and lead to more inflationary pressures. But, at this stage of the recovery with a soft patch expected in exports in the first half of 2013, inflation in Asia shouldn’t be an issue for most of 2013.
Chart 5: Inflation is still declining generally
9 8 7 6 5 4 3 2 1 0 -1 -2 TWD PHP INR US SGD IDR Avg MYR CNY HKD THB KRW VND CPI % YoY 3m ppt change

1.0

0.5

0.0 Jan-12 May-12 May-11 Sep-12 Jan-11 Sep-11 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-13

New Total Financing

New Bank Lending

Source: PBoC, CEIC, SEB

Asia outside China Similar to China, a big macro driver for rest of Asia has been credit growth that has supported domestic demand in lieu of weak exports. The view going forward here is a bit mixed based on location. Total credit growth has been generally slowing (Chart 4, blue line) but the slowdown has been led mostly by North Asia (Korea, Taiwan, Hong Kong). On the other hand, South Asia’s domestic economy will be relatively better supported by credit growth going forward. This makes sense since the less developed South Asia is financially less developed (smaller debt) and has room to increase credit growth. Also, a low global inflationary environment has allowed the higher growth and inflation prone South Asian economies to continue to use credit growth to fuel the domestic economy.
Chart 4: Credit growth is dispersed by location
25 20 15 10 5 0 -5 Sep-08 Mar-08 South Asia Sep-09 Mar-10 Mar-09 North Asia ex China Mar-12 Mar-11 Sep-10 Sep-11 Asia Sep-12 Credit growth % yoy averages 25 20 15 10 5 0 -5

Source: CEIC, Bloomberg, SEB

Intervention slowing down FX moves Despite a growth recovery, Asian FX hasn’t moved as much because of intervention. Chart 6 shows changes in FX reserves since September and every economy has been intervening with the exception of Thailand. Furthermore, relatively stable USDCNY fixing since late October has also likely encouraged Asian central banks to intervene since their biggest export competitor hasn’t move. Lastly, with the benign inflation backdrop, central banks don’t see any rush to tighten via an appreciating currency.
Chart 6: Intervention preventing faster appreciation
6 5 4 3 2 1 0 -1 -2 HKD SGD PHP IDR MYR KRW TWD CNY INR -1.1 THB 2.8 2.7 2.4 1.6 1.5 1.3 0.8 0.6 5.3 % Change in FX reserv es from Sep 2012 to current

Source: CEIC, Bloomberg, SEB

How to position going forward?
Source: CEIC, SEB

Inflation not a show stopper for domestic demand What can stop the credit induced growth? Inflation will be the show stopper since that will lead to higher interest rates and raise the price for obtaining loans and financing. Chart 5 shows that currently, inflation is generally declining and isn’t threatening to end the credit

Our view is that investors should retain long Asian currencies positioning. Export recovery will support the current account and higher relative growth to G3 will encourage capital inflow. However, 3 months ago the call was directional when a recovery was not consensus. Now, a continued recovery scenario is largely consensus and prices have moved to reflect the view. Therefore, we think it is better to

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Asia Strategy Focus

approach investing in Asian currencies through themes in 2013. We see 3 themes developing and recommend the following trades. Theme #1 - Trend following: expressed through short USDKRW. Sustained recovery means that we should be breaking out from range trading and risk on/off environment. Medium term trends should start forming. The best performing currency over the last three months and 2012 as a whole has been the KRW and we think KRW will continue to appreciate. As discussed in our previous Asia Strategy Focus, Korea to leave ASEAN (5 Dec 2012), Korea will benefit from foreign bond inflows. Korea’s high private sector debt limits borrowing and investing and will shift towards a lower inflation and interest rates economy. Furthermore, the high debt is hurting property prices (Chart 7) and Bank of Korea may join India to be the only 2 economies in Asia that will cut interest rates in 2013. We think an export soft patch in 2Q will lead to rate cut by BoK.
Chart 7: Korea, only one with declining house prices
190 Property Prices 2009=100 180 170 160 150 140 130 120 110 100 90 80 70 Jan-09 Jan-10 Beijing Singapore HK Taipei

Malaysia’s equity market is often expensive since domestic funds and public institutions buy and hold Malaysian stocks, which make foreigners reluctant to buy Malaysia as it is over-priced and discourages Malaysian companies from aggressively increasing profitability. With domestic institutions divesting, that will force more foreign inflows and should lead to more efficient Malaysian companies. This is another positive for MYR. Another event we foresee this year is for China to widen the daily trading band from +/- 1% from USDCNY fixing to +/-1.5%. Exact timing is always difficult but, the next move in 1H 2013 is a very reasonable timeframe relative to history since it took about 22 months for the first widening of the trading band from 0.3% to 0.5% (July 2005 to May 2007) and it has been about 21 months since the last widening from 0.5% to 1.0% (April 2011 to Jan 2012, the 0.5% to 1.0% move took longer because of the Global Financial Crisis in 2008). The widening will be positive for CNY but the move will be limited for USDCNY since it already trades 1% stronger to the daily fixing (only 50bp upside). We think it is better to position with more flexible and the most correlated currency to CNY. Chart 8 shows that MYR and PHP are the most correlated currency to CNY. Hence we like being short USDMYR since it has its own event catalyst from the election and the exposure to CNY band widening.
Chart 8: Correlation to USDCNY
0.3 0.25 3M Correlation to USDCNY as of Jan 10, 2013

Jan-11 Mumbai Bangkok

Jan-12 Kuala Lumpur Seoul

0.2 0.15 0.1 0.05 0 -0.05 -0.1 -0.15 -0.2 IDR INR SGD THB TWD KRW MYR PHP

Source: CEIC, SEB

Short USDPHP also fits this theme as another stellar performing currency and equity market in 2012 and the only economy in Asia with a potential credit rating upgrade in 2013. However, seasonally PHP appreciation tends to be weaker in January and February as remittances slowdown but we would revisit in March after the resolution of the debt ceiling conversations in the US. Theme #2 - Event trade: expressed through short USDMYR. To generate alpha in a sustained, gradual recovery macro environment, picking out events will be crucial to outperform. Within Asia, Malaysia is the only economy that has top leadership election this year and elections must be called by June. Considering the demographics, Prime Minister Najib will likely win the election, but the question is by how much. With the economic cycle running relatively stable and inflation low, the chances of a downside surprise to his popularity is low in our view and the election will likely move smoothly. This will reduce the political event risk priced into MYR and act as a catalyst. In addition, a strong majority for Najib would allow him to continue with his liberalization plans, especially in the equity market.

Source: Bloomberg, SEB

Theme #3 - Rotating fundamentals: expressed through long IDR or INR and fund through SGD or HKD. Fundamentals ruled during much of last year as global sovereign debt crisis loomed. Since Asian economies tend to have minimal fiscal debt issues, the fundamental focus was on the current account (Chart 9). The European crisis reduced global capital flows and Indonesia and India couldn’t fund the current account deficit and led to depreciation in their currencies. All Asian currencies appreciated last year with the exception of India and Indonesia.

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Asia Strategy Focus

Chart 9: Asia’s current account
25 20 15 10.0 10 5 0 -5 -5.7 -10 INR IDR THB CNY PHP KRW MYR TWD SGD -2.4 0.7 2.6 3.8 3.9 6.4 Current Account % of GDP 17.7

Long USDHKD is another alternative. USDHKD is trading at the very bottom of the peg at 7.75 and cannot get any stronger from a more positive macro environment. Hong Kong inherits US interest rate policy from the peg to the USD and low rates have pushed up asset prices in Hong Kong. Rebound in China’s growth and return of CNY appreciation has also helped Hong Kong. However, there are risks that HKD will weaken. One risk is that as the US economy’s recovers, expectations of increase in Fed’s balance sheet can be curtailed and longer term yields may start to rise. The rise in rates through the peg will pressure Hong Kong rates to rise and lower Hong Kong priced assets. Both of these will push USDHKD higher. Furthermore, long USDHKD can act as hedge if China or general global risk re-emerges. Long USDHKD is also a small positive carry hedge. Of course the main risk is if the USDHKD peg breaks. However, in that scenario we think China and Asia’s outlook needs to be significantly strong and our general long Asia trades will have already performed well. CNY Strategy – We will run a separate strategy for CNY. Our view is that USDCNY will appreciate at the 1-2% annualized pace this year and we prefer to play this directional theme through other Asian currencies such as the MYR mentioned above. We see USDCNY spot ending the year at 6.10. Our CNY specific strategy remains to be short USDCNH 12M and long USDCNY 12M NDF (see What’s cooking in CNY for 2013? 26 Nov 2012). We prefer CNH over NDF because a) CNH provides positive carry whereas NDF no longer does (Chart 10) b) we are anticipating a widening in the daily trading band, which will have a bigger impact on spot referenced markets (CNY onshore and CNH) c) we think the move in fixing will be more concentrated towards 2H when the economy and political transition are on a firmer footing and signs of inflation and monetary tightening bias return. On timing, we would wait for better entry. This trade has worked extremely well since end of December and 12 month outright NDF and CNH have converged. We would like to see this spread widen in the coming months to put the trade on.
Chart 10: NDF no longer pricing in depreciation
3 2 1 0 -1 -2 USDCNY NDF -3 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 USDCNH 12M Implied y ield %

Source: CEIC, SEB

In 2013, as recovery becomes more certain we think investors will move out the risk curve and start investing in under-performed and less fundamentally sound currencies, which are INR and IDR. We like IDR better fundamentally since we expect improvements in the current account from recovery in the trade deficit. Indonesia is a big commodity exporter and recovery in China’s domestic economy should see its exports recover and help adjust the trade deficit. With that said, timing is key in IDR and currently the central bank appears to be comfortable with a weaker IDR since it is not feeding through to inflation. We recommend trading IDR tactically where IDR NDFs should only be bought when forward points spike and take profit when it resettles towards spot. The trade to anticipate a movement lower in IDR spot may not emerge until 2Q. We will keep a close watch. The alternative is INR and short term it can perform better than IDR as a more stable global financial market attracts equity flow back into India. The carry is higher in India compared to Indonesia. We think the bigger move lower in USDINR will take place once the central bank can start more aggressive interest rate cuts, which will be towards second half of the year. On the funding side, we prefer to fund using SGD or HKD. USDSGD will continue to appreciate but we think the pace will lag the region. SGD benefited from its strong fundamentals of double digit current account surplus, minimal fiscal debt and liquid foreign exchange market (in Asian terms). However, performance should lag going forward as fundamentals start to matter less and valuation caps big gains since SGD NEER still trades towards the stronger side of the band. In addition, cyclically, inflation has eased from over 5% in the middle of 2012 to close to 3.5% recently. Inflation is mostly housing and autos (autos are inflated by increased auction price to own a car) and at least for housing, more cooling measures have been introduced such as increasing stamp duty on home purchases by 5-7 percentage points. The measures will prevent a rebound in inflation and greatly reduces the risk of MAS accelerating the pace of appreciation in April’s policy meeting.

Source: Bloomberg, SEB

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Asia Strategy Focus

Event Risk and Timing - Temporarily reduce risk in late February for Debt Ceiling talks. We suggest positioning for long Asian currencies but we are worried about the US debt ceiling talks that will likely commence in February. Asian markets will probably resort to the Fiscal Cliff trading style where risks will only be priced in

at the last minute. Risk assets like equities can have a healthy 10% correction and typically Asian currencies get hit also. Our suggestion is to run with the above themes for the year but will introduce tactical themes towards mid to late February to hedge the 12 month themes outlined above.

6

Asia Strategy Focus

Asia FX Portfolio
Last week we initiated an Asia FX Portfolio by going Long MYR vs. USD. We will build the portfolio over the first quarter to reflect the 2013 themes mentioned above. The trades we are considering to add are 1) Long KRW vs. USD 2) Long INR vs. SGD 3) Long USDHKD 4) Long 12M CNH vs. 12M CNY NDF. We will be publishing Currency Strategy at the end of the month led by our Chief Currency Strategist Carl Hammer. From there we will look to diversify our funding away from USD to other G10 currencies.

Current Trades Long MYR vs USD 1M NDF Closed Trades

Date of Weight in Spot at Entry PF Entry 11-Jan-13 16.66% 3.0165

Fwd at Entry 3.021

Target 2.94

Stop 3.061

Current Spot Price 3.0198

Price at Exit

Date of Exit

Profit* -0.09%

Weighted Profit** -0.02%

Year to Date Returns 2013
*Profit is calculated as spot at entry to current spot plus carry earned from date of entry. We are assuming that carry is earned evenly, every day for simplicity. ** Weighted Profit is the profit of the trade multiplied by the weight in the portfolio.

-0.02%

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Asia Strategy Focus

FX Tracker
Performance
What stands out? Positive correlation between equity and currency markets continued for the second month lifting Asian assets. However, G3 FX moves are dwarfing Asian FX movements. China related equity markets performed well and Philippines remains the star performer on equity, bonds and currency. Hawkish Fed minutes have pushed rates higher in Asia and have steepened the curve. Growth related steepening will remain positive for Asia but yield increase from fiscal scare will hurt Asian performance and worth following going forward. Indonesian 5 year bonds continued to fall from canceled bond auctions but yields will again rise in 2013.

Chart 15: Currencies
4.0 2.0 0.0 (2.0) (4.0) (6.0) (8.0) (10.0) ADXY CNH DXY KRW TWD PHP THB SGD AUD INR IDR MYR CNY EUR JPY (% v s USD) 1M change from 10/12 to 10/01

Chart 16: Equity markets
14 12 10 8 6 4 2 0 HSCEI HSI SHCOMP TWSE KLCI STI MSCIAxJ SENSEX
INR -7.7 Palm oil Oil brent Copper Gold Nat gas

(%)

1M return from 10/12 to 10/01

PCOMP

SPX

Nikkei

Chart 17: 5 year rates
(bp) 40 30 20 10 0 (10) (20) (30) (40) IDR PHP KRW AUD INR JPY Bunds MYR UST TWD THB CNY SGD 1M change from 10/12 to 10/01

Chart 18: 2 year rates
30 25 20 15 10 5 0 (5) (10) (15) IDR PHP Bunds MYR TWD THB CNY SGD KRW AUD UST JPY (bp) 1M change from 10/12 to 10/01

Chart 19: 2 year 5 year slope
(bp) 20 10 0 (10) (20) (30) (40) (50) (60) PHP AUD INR Bunds TWD CNY SGD KRW UST MYR THB JPY IDR 1M change from 10/12 to 10/01

Chart 20: Commodities
(%) 10 8 6 4 2 0 (2) (4) (6) (8) (10) 7.3 4.2 0.1 1M change from 10/12 to 10/01

-2.2

Source: Bloomberg, SEB

8

Kospi

SET

JCI

Asia Strategy Focus

Forwards
Chart 21: 3 month implied yield annualized vs. 1 month ago
10 8 6 4 2 0 (2) (4) (6) (8) IDR TWD HKD CNH THB KRW AUD SGD MYR EUR CNY PHP INR JPY (%) 1/10/13 12/10/12 change ov er the last 1mth, (rhs) (ppts) 5 4 3 2 1 0 -1 -2 -3 -4

What stands out? Implied yields continue to fall following spot. Many markets such as CNY NDF, PHP, TWD are pricing in appreciation and carry continues to diminish. IDR and INR still offer attractive positive carry. CNY NDFs are pricing in appreciation across the curve. We prefer going long CNY onshore the most followed by CNH. IDR one month forwards rise is overdone and are good times to go short USDIDR 1M.

Chart 22-1: CNH Outright
6.38 6.33 6.28 6.23 6.18 6.21 6.23 6.20 6.19 Spot 1M 3M 6.22 6.26 6.24 Current (10-Jan ) 6.36 1-mth ago (10-Dec )6.33 6.30 6.29 6.27

Chart 22-2: CNH forward yield curve
3.00 2.50 2.00 1.50 1.00 0.50 0.00
6M 9M 12M
(%)

Chart 22-3: CNH forward yield curve ann.
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 2.65 2.09 1.84 1.77 Current (10-Jan ) 1-mth ago (10-Dec ) 1M 3M 6M 9M 1.68
(%)

Current (10-Jan ) 1-mth ago (10-Dec ) 2.40 1.88 1.34 0.77 1.33 0.91 0.52 0.22

3.77 3.13 2.69 2.52 2.40

1.68

0.31

1M

3M

6M

9M

12M

12M

Chart 23-1: CNY NDF Outright
6.32 6.31 6.30 6.29 6.28 6.27 6.26 6.25 6.24 6.31 6.29 6.28 6.28 6.28 6.30 6.29

Chart 23-2: CNY NDF yield curve
0.4 0.3 0.2 0.1 0.0 6.27 -0.1 -0.2 -0.3 -0.18 1M -0.14 -0.16 -0.17 3M 6M -0.04 -0.17 9M -0.15 -0.17
( %)

Chart 23-3: CNY NDF yield curve ann.
0.5 0.31 0.0 -0.5
( %)

Current (10-Jan ) 1-mth ago (10-Dec ) 0.12

-0.09 -0.65 -1.67 -2.13 -0.69 -0.34

0.16

0.31

-1.0 -1.5 -2.0 -2.5

-0.20

-0.17

6.27 6.27 6.27 6.27 Current (10-Jan ) 1-mth ago (10-Dec ) Spot 1M 3M 6M 9M 12M

Current (10-Jan ) 1-mth ago (10-Dec ) 3M 6M 9M 12M

12M

1M

Chart 24-1: CNY Onshore Outright
6.43 6.38 6.33 6.28 6.23 6.18 6.22 Spot 6.24 1M 3M 6.25 6.24 Current (10-Jan ) 1-mth ago (10-Dec ) 6.35 6.29 6.33 6.26 6.27 6.39

Chart 24-2: CNY onshore fwd yield curve
2.5 2.0 1.5
( %)

Chart 24-3: CNY onshore yield curve ann.
5.0
(%)

Current (10-Jan ) 1-mth ago (10-Dec ) 0.86 0.33 0.20 0.45 1.36 0.81 1.83 1.21

2.32 1.64

4.0 3.0 2.0 1.0 0.0

3.99

3.47

Current (10-Jan ) 1-mth ago (10-Dec ) 2.74

2.45

2.32

6.33 6.30

1.0 0.5 0.0

2.48

1.81

1.63 6M

1.62 9M

1.64 12M

6M

9M

12M

1M

3M

6M

9M

12M

1M

3M

Source: Bloomberg, SEB

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Asia Strategy Focus

Chart 25-1: HKD Outright
7.76 Current (10-Jan ) 1-mth ago (10-Dec ) 7.751 7.75 7.750 7.748 7.748 7.747

Chart 25-2: HKD forward yield curve
0.00 -0.01 -0.02 -0.03 -0.04 7.744 7.745 9M 12M -0.05 -0.06 -0.04 Current (04-Dec ) 1-mth ago (05-Nov ) 1M 3M 6M 9M 12M
(%)

Chart 25-3: HKD forward yield curve ann.
0.00
( %)

0.00 -0.01 -0.01 -0.02 -0.02 -0.04 -0.04 -0.05

-0.03 -0.04 -0.04 -0.14 -0.17 -0.11

-0.04

-0.04

0.00

-0.05 -0.10 -0.15 -0.20 1M 3M

7.749 7.750 7.750 7.749

-0.10

-0.09

7.747 7.74 Spot 1M 3M 6M

Current (10-Jan ) 1-mth ago (10-Dec ) 6M 9M 12M

Chart 26-1: IDR Outright
10,600 10,400 10,200 10,000 9,800 9,600 9,400 9,200 Spot 1M 9,633 9,867 10,155 10,034 9,812 9,940 9,752 Current (10-Jan ) 1-mth ago (10-Dec ) 3M 6M 9M 12M 9,948 10,254 10,365 10,133 10,025

Chart 26-2: IDR forward yield curve
6.0 5.0 4.0 3.0 2.0 1.0 0.0 0.17 1M 0.20 0.69 3M 1.11 1.78
(%)

Chart 26-3: IDR forward yield curve ann.
20.0 (%) 15.87 15.0 Current (10-Jan ) 1-mth ago (10-Dec ) 7.64 10.31 5.0 0.0 6.56 1M 3M 6.48 5.46 6M 5.59 5.42 5.05 12M

Current (04-Dec ) 1-mth ago (05-Nov ) 3.62 2.20

5.06

4.22 2.97

10.0

5.26 9M

6M

9M

12M

Chart 27-1: INR Outright
58 57 56 55 54 53 52 Spot 1M 3M 54.58 54.68 54.51 54.68 55.24 Current (10-Jan ) 1-mth ago (10-Dec ) 6M 9M 12M 55.19 56.11 56.03 56.79 57.57 57.61 56.87

Chart 27-2: INR forward yield curve
6 5 4 3 2 1 0 1M 0.32 0.19 3M 6M 9M 12M 1.26 1.22
(%)

Chart 27-3: INR forward yield curve ann.
5.62 5.56

Current (10-Jan ) 1-mth ago (10-Dec ) 4.19 4.21 2.80 2.81

6 5 4 3 2 1 0

(%)

5.12 3.92 4.96

5.67 5.70

5.63 5.62 5.64 5.56

2.33

Current (10-Jan ) 1-mth ago (10-Dec )

1M

3M

6M

9M

12M

Chart 28-1: KRW Outright
1,100 1,090 1,080 1,070 1,060 1,050 1,040 Spot 1M 1060 1060 1065 1069 1073 1077 1,082 1,079 1,080 1,094 1,087 1,091

Chart 28-2: KRW forward yield curve
2.00 1.50 1.00 0.50 0.00 -0.50 12M 1M -0.01 3M 6M 9M 12M 0.06
( %)

Chart 28-3: KRW forward yield curve ann.
2.0 1.5 1.39 1.0 0.5 0.0 -0.5 -0.11 1M 3M 6M 9M 12M 0.69 1.41 1.14 1.41 1.39
( %)

Current (10-Jan ) 1-mth ago (10-Dec ) 1.21 0.83 0.41 0.28 0.70 1.06

1.58

1.67

1.67

1.61

1.58

Current (10-Jan ) 1-mth ago (10-Dec )

Current (10-Jan ) 1-mth ago (10-Dec ) 3M 6M 9M

Source: Bloomberg, SEB

10

Asia Strategy Focus

Chart 29-1: MYR Outright
3.12 3.10 3.08 3.06 3.04 3.02 Spot 1M 3.03 3.06 3.03 3.07 3.07 3M 3.09 3.05 3.04 3.11 3.10 Current (10-Jan ) 1-mth ago (10-Dec ) 3.07 3.08

Chart 29-2: MYR forward yield curve
2.0 1.5 1.0 0.5 0.0 -0.5 6M 9M 12M -0.10 1M 3M 6M 9M 12M 0.41 0.12 0.21
(%)

Chart 29-3: MYR forward yield curve ann.
2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -1.14 1M 3M 0.86 Current (10-Jan ) 1-mth ago (10-Dec ) 6M 9M 12M
(%)

Current (10-Jan )

1.31 1-mth ago (10-Dec ) 0.87 0.73

1.70 1.58

1.67

1.75 1.46

1.75 1.58

1.70 1.56

1.46

1.17

Chart 30-1: PHP Outright
41.2 41.0 40.8 40.6 40.4 40.2 40.0 39.8 Spot 1M 40.95 40.93 40.90 40.89 40.8740.90 40.68 40.47 40.3540.31 40.30 40.27 Current (10-Jan ) 1-mth ago (10-Dec ) 3M 6M 9M 12M

Chart 30-2: PHP forward yield curve
0.0 -0.2 -0.4 -0.6 -0.8 -1.0 -1.2 1M 3M 6M 9M -0.80 -0.90 -0.92 -1.00 12M -0.50
( %)

Chart 30-3: PHP forward yield curve ann.
0.0
(%)

-0.05

-0.12

-0.15

-0.20-0.12

-1.0 -2.0 -3.0 -4.0 -5.0 -6.0 -7.0

-0.58

-0.49

-0.29

-0.26

-0.12

Current (10-Jan ) 1-mth ago (10-Dec )

-1.79 -3.16

-1.23 -1.00

Current (10-Jan ) -5.88 1M 3M 1-mth ago (10-Dec ) 6M 9M 12M

Chart 31-1: SGD Outright
1.224 1.222 1.222 1.222 1.222 1.222 1.222 1.222 1.221 1.221 1.221 1.221 1.221

Chart 31-2: SGD forward yield curve
0.02 0.00 -0.02 -0.04 0.00
( %)

Chart 31-3: SGD forward yield curve ann.
0.10
(%)

0.00

0.01 0.00 -0.02 -0.01 -0.03

Current (10-Jan ) 1-mth ago (10-Dec ) 0.05 0.02 -0.03 -0.05 -0.05 1M 3M 6M -0.07 9M

0.05 0.00 -0.05

1.221

0.00 -0.03 -0.05 -0.07 12M

1.218 Spot

Current (10-Jan ) 1-mth ago (10-Dec ) 1M 3M 6M 9M 12M

-0.06 -0.08 1M

Current (10-Jan ) 1-mth ago (10-Dec ) 3M 6M -0.05 9M

-0.05 -0.07 12M

-0.10

Chart 32-1: THB Outright
31.5 31.0 30.5 30.31 30.0 29.5 Spot 1M 3M 30.26 30.64 30.69 30.79 30.94 31.08 31.20

Chart 32-2: THB forward yield curve
2.0 1.5 1.0 0.5 0.0 1M 0.15 0.46 0.50 0.17 3M 6M 9M 12M 0.86 0.96
( %)

Chart 32-3: THB forward yield curve ann.
2.7 2.5 2.3 2.1 1.9 1.7 1.5 1M 1.82 1.85 3M 1.73 6M 1.88 9M 2.12 2.01
( %)

Current (10-Jan ) 1-mth ago (10-Dec ) 1.75 1.40 1.44 1.83

Current (10-Jan ) 1-mth ago (10-Dec ) 1.93 1.92

30.40

30.79 30.5230.69

1.83 1.75 12M

Current (10-Jan ) 1-mth ago (10-Dec ) 6M 9M 12M

Source: Bloomberg, SEB

11

Asia Strategy Focus

Chart 33-1: EUR Outright
1.340 1.330 1.320 1.310 1.300 1.290 1.280 1.270 Spot 1M 3M 1.327 1.328 1.331 1.328 1.329 1.330

Chart 33-2: EUR forward yield curve
0.00 -0.10 -0.20 -0.30 -0.40 -0.50 1M
(%)

Chart 33-3: EUR forward yield curve ann.
-0.20
(%)

-0.02

-0.07 -0.14 -0.22 -0.31

-0.04 -0.09 -0.20

-0.25 -0.30 -0.35 -0.40 -0.45 -0.44 12M -0.50

-0.29 -0.29

Current (10-Jan ) 1-mth ago (10-Dec ) -0.29 -0.30 -0.39 -0.42 -0.31 -0.44

1.294 1.295 1.295 1.297 1.298 1.300 Current (10-Jan ) 1-mth ago (10-Dec ) 6M 9M 12M

-0.32 Current (10-Jan ) 1-mth ago (10-Dec ) 3M 6M 9M

-0.37 -0.42 1M 3M 6M

9M

12M

Chart 34-1: JPY Outright
90.0 88.0 86.0 84.0 82.0 80.0 78.0 82.4 82.3 82.3 82.2 82.1 82.0 Current (10-Jan ) 1-mth ago (10-Dec ) Spot 1M 3M 6M 9M 12M 88.8 88.8 88.7 88.6 88.6 88.4

Chart 34-2: JPY forward yield curve
0.0 -0.1 -0.2 -0.3 -0.4 -0.5 1M
( %)

Chart 34-3: JPY forward yield curve ann.
-0.1
( %)

-0.02

-0.07 -0.15

Current (10-Jan ) -0.27 1-mth ago (10-Dec ) -0.28 -0.36 -0.50 -0.30 -0.36 -0.34 -0.39 -0.44 12M

-0.04

-0.2 -0.26 -0.39 -0.3 -0.4 -0.5 -0.44 12M -0.6 1M 3M

-0.09 -0.18 -0.30 Current (10-Jan ) 1-mth ago (10-Dec ) 3M 6M 9M

-0.40

6M

9M

Chart 35-1: AUD Outright
1.07 1.06 1.05 1.04 1.03 1.02 1.01 1.00 Spot 1M 3M 6M 9M 12M 1.060 1.057 1.053 1.049 1.046 1.042 1.035 1.028 1.022 1.032 1.046 Current (10-Jan ) 1.039 1-mth ago (10-Dec )

Chart 35-2: AUD forward yield curve
3.0 2.5 2.0 1.5 1.0 0.5 0.0 1M 0.26 0.69 0.24 3M 0.69
( %)

Chart 35-3: AUD forward yield curve ann.
3.2 2.73 3.0 2.8 3.11
( %)

Current (10-Jan ) 1-mth ago (10-Dec ) 2.02 1.37 1.35

2.67

2.89 2.78 2.80 2.73 2.71 2.73 2.67 2.73

2.04

2.6 2.4 2.2 2.0

2.75

Current (10-Jan ) 1-mth ago (10-Dec ) 1M 3M 6M 9M 12M

6M

9M

12M

Source: Bloomberg, SEB

12

Asia Strategy Focus

Volatility
Chart 40: 3 month annualized implied volatility
14 12 10 8 6 4 2 0 KRW TWD AUD PHP THB SGD CNH INR IDR MYR CNY JPY EUR (%) 1/10/13 12/10/12 change ov er the last 1mth, (rhs) (ppts) 4 3 2 1 0 (1) (2) (3)

What stands out? Implied volatility continues to be low with the exception of MYR, PHP and JPY. JPY remains on an upward trend while EUR vol drops. Sharp rise in realized IDR vol is concerning (Chart 44). SGD and MYR vols are rising and KRW, TWD and PHP implied vol remain the only ones retaining a down trend.

Chart 41: CNH
6 Implied Realized

Chart 42: CNY NDF
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Implied Realized

Chart 43: HKD
1.0 0.8 0.6 0.4 0.2 0.0 Implied Realized

4

2

0 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13

Jan-12 Apr-12

Jul-12

Oct-12

Jan-13

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Chart 44: IDR
20 15 10 Implied Realized

Chart 45: INR
15 10

Chart 46: KRW
16 12 8 Implied Realized

5

5 0 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13
0 Jan-12

Implied

Realized

4 0

Apr-12

Jul-12

Oct-12

Jan-13

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Chart 47: MYR
12 9 6 3 0 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Implied Realized

Chart 48: PHP
10 8 6 4 2 0 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Implied Realized

Chart 49: SGD
12 9 6 3 0 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Implied Realized

Source: Bloomberg, SEB

13

Asia Strategy Focus

Chart 50: THB
8 6 4 2 0 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Implied Realized

Chart 51: TWD
8 6 4 2 0 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Implied Realized

Chart 52: EUR
18 15 12 9 6 3 0 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Implied Realized

Chart 53: JPY
12 10 8 6 4 2 0 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Implied Realized

Chart 54: AUD
18 15 12 9 6 3 0 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Implied Realized

Source: Bloomberg, SEB

14

Asia Strategy Focus

Forecasts
FX USD/CNY USD/CNH USD/HKD USD/IDR USD/INR USD/KRW USD/MYR USD/PHP USD/SGD USD/THB USD/TWD EUR/USD USD/JPY
Policy Rates CH CH RRR KR IN ID MA PH TH TW

Spot 6.22 6.18 7.75 9866 54.8 1056 3.02 40.6 1.23 30.3 29.0 1.31 87.5
Current 6.00 20.00 2.75 8.00 5.75 3.00 3.50 2.75 1.88

1Q13

2Q13

3Q13

4Q13

6.19 6.19 7.80 9800 54.0 1045 2.95 40.3 1.21 30.1 28.5 1.33 88
1Q13 6.00 20.00 2.75 7.75 5.75 3.00 3.50 2.75 1.88

6.17 6.17 7.80 9750 53.5 1030 2.90 40.1 1.20 30.0 28.4 1.30 90
2Q13 6.00 20.00 2.50 7.50 5.75 3.00 3.50 2.75 1.88

6.15 6.15 7.80 9700 52.0 1020 2.87 39.5 1.19 29.7 28.3 1.25 92
3Q13 6.00 20.00 2.50 7.00 5.75 3.00 3.50 2.75 1.88

6.10 6.10 7.80 9650 51.0 1000 2.85 39.0 1.18 29.3 28.0 1.22 94
4Q13 6.25 20.00 2.50 7.00 6.00 3.25 3.75 3.00 2.00

Real GDP % yoy China India Indonesia Korea Singapore US Euro zone

2012 7.7 5.5 6.2 2.5 2.2 2.2 -0.4

2013 8.1 5.9 6.4 3.9 4.5 2.4 -0.2

2014 7.7 6.2 6.1 3.6 4.1 2.7 0.8

Source: Bloomberg, SEB. Spot is referenced to time of forecast.

15

Asia Strategy Focus

DISCLAIMER
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16

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