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Scotia Asian FX Update
Tuesday, June 7, 2011
Sacha Tihanyi Senior Currency Strategist +852 2861‐4770 firstname.lastname@example.org
% Change over last 24 hours S&P 500 ‐1.08 Nikkei ‐0.35 Shanghai Comp. 0.84 Hang Seng ‐1.49 Crude Oil ‐1.60 Gold ‐0.14 US 2yr Yield (level) 0.42
ASIAN FX WEAKENS IN LIGHT OF EUROZONE AND WEAK US DATA
• China, Hong Kong, Korea and Taiwan markets back open after long holiday weekend. • USDCNY fixes lower as China rate hike speculation continues to build. • Taiwan sees May CPI today as consensus expects 1.64% y/y. • Despite recent global equity gloom, Asia Ex‐Japan equities are outperforming the global average.
FX Market Update ‐ Markets continue to lick old wounds and inflict new ones in the face of ever present Eurozone worry and weak global economic data, with Friday’s May US nonfarm payrolls still fresh in the mind of the market. The global equity complex is continuing to shed points as the MSCI World Index is down around 3.4% from last Thursday’s open, and the S&P 500 is down around 4.4% from the first of the month in a rather inauspicious start to June. However, the relative performance of emerging market equities, and Asia in particular, show an interest‐ ing dynamic that speaks to the impressive ability of Asian FX to sustain valuations in the face of what oth‐ erwise should be USD‐boosting equity weakness. Looking at the relative performance since May 25th (see chart), Asian Ex‐Japan equities have outper‐ formed global equities by a margin of more than 3.5%, very much in line with the impres‐ sive gains in the EM Asian currency block against the USD. Our trade‐weighted USD/ EM Asian FX index is down around 0.75% over that same time period. This has gener‐ ally been the correlative pattern over the past year as Asia Ex‐Japan equity outperfor‐ mance has for the most part been accompa‐ nied by Asian FX outperformance relative to the greenback, though during periods of sharp underperformance in Asian equities, the currency complex has been kept less volatile by official efforts. EUR has managed to put in a solid performance over the past few sessions, and Asia has lagged by over 3% on a broad trade‐weighted basis, speaking to the much more volatile EUR‐Asia currency Source: Scotia FX Strategy, Bloomberg dynamic. This week brings a number of important Asian economic events, including China’s May trade data, Tai‐ wanese CPI and trade, Korean final Q1 GDP and an interest rate decision, Malaysian industrial production as well as Indian industrial production. There is also a growing belief that a Chinese monetary policy move (likely an interest rate increase) is due over the coming days, though we will also note that rumours had persisted recently regarding a widening in the daily trading band for USDCNY, an event that would constitute another incremental step towards greater renminbi flexibility. On the Chinese trade data front, certainly a strong export number will be interpreted in the context of the current state of global demand (strong exports offsetting negative gloom over US weakness for instance), however imports may be the key signal here considering the signs of a slowing in Chinese domestic growth. USDCNY(6.4782)• Given the very weak spate of US economic data recently, culminating in the nonfarm payrolls print heading into last weekend, it is rather surprising that CNY has appreciated in recent sessions (EUR strength has been a CNY‐supportive factor). Chinese markets open today after the long weekend and we have received our first post‐nonfarm payroll USDCNY fix. The fix was pushed 30 pips lower to 6.4816 vs. Friday’s fixing, a positive for Asian FX sentiment despite the weakness in the group that we are seeing today vs. the USD. A piece in yesterday’s China Daily is stoking expectations that we could see an
Asia Ex‐Japan equities out‐ perform global equities by more than 3.5% in recent days Speculation over Chinese rate hike swirls; USDCNY trading band widening possi‐ ble.
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GLOBAL FX STRATEGY
Tuesday, June 07, 2011
There is nearly a 50‐50 chance of a BoK rate hike this week accord‐ ing to consensus We believe USDTWD is still heading towards 28.50 in near term, but risk aversion temporar‐ ily halts gains
increase in China’s deposit rate into the weekend. This would likely not be supportive of global risk assets considering the current environment, but the direction of CNY on the official fix (and via market trading) implies that policymakers will not be pushed off their tightening path by signs of economic weakening. USDKRW(1081.15)• The won is trading a touch weaker in today’s session (down 0.3%) as the Korean market returns from the long weekend and prices in the impact of a less constructive global risk environment and weak US jobs data. The 1075 level has generally proven to be quite a difficult hurdle for USDKRW, as several attempts at that point over recent sessions have failed to bring a sustained or conclusive break lower past this support point. In the meantime, the final read on Q1 Korean GDP out early in tomorrow’s Asian session will provide some risk for the currency leading into Friday’s monetary policy decision. Given the recent developments in Korean core inflation (last week’s May print came in at 3.5% which is a post‐ global recession high), the case for a rate hike has grown, particularly considering the stability in USDKRW over the past two months. There sentiment amongst economists polled by Bloomberg is tilted marginally towards a hike, with 6 of 11 economists polled expecting a 25bp increase to 3.25%. However, with the continued weakness displayed by the economic indicators of large and important economies of late, the Bank of Korea may be incented to continue to be cautious with monetary normalization despite the near term spike in core. Domestic players are looking for perhaps a 20%‐30% chance of a hike, implying that if the balance of economist opinion is proven correct KRW could regain a bid (with BoK resistance perhaps). USDTWD(28.72)• Taiwan’s May inflation is due today, with the market looking for an uptick to 1.64% y/y in headline CPI versus the previous 1.34%. M2 growth has eased off of the upper end of the Central Bank of China (Taiwan) target of 6% y/y growth in M2. Infla‐ tion is just barely above the decade average pace of increase of 1% y/ y, while M2 growth is persisting a touch higher than the 5.18% y/y 10yr average rate of growth. These trends argue for steady and incre‐ mental policy normalization (at a pace of 12.5bp hikes) for the time being. TWD has also remained fairly resilient over the past few ses‐ sions, though is trading lower by 0.2% today in the wake of Asian FX weakness. Our recommended short term trade of long TWD vs. the USD, initiated on April 20th at 28.775 with a target of 28.50 and a stop at 29.30, is sitting up 0.2% as TWD has given up some of its pre‐ vious gains (of more than 0.7%) over the past few sessions as risk aversion has made itself felt. Nevertheless we still like the short term 28.50 target and look for TWD to regain support, potentially follow‐ ing today’s CPI data. Source: Scotia FX Strategy, EMED Key Pricing & Levels 30 Day 1 Day % 1 Week 1 Month 50 Day 100 Day 200 Day Hi st Spot Chg % Chg % Chg MA MA MA
USDCNY USDHKD USDIDR USDINR USDJPY USDKRW USDMYR USDPHP USDSGD USDTHB USDTWD AUDUSD Vol 1.6 0.5 4.3 5.1 7.4 9.0 9.3 5.8 6.3 3.3 4.5 11.8 6.4782 7.7786 8523 44.76 80.18 1081.15 3.0125 43.30 1.2321 30.32 28.72 1.0717 0.08 0.00 0.18 0.13 ‐0.05 ‐0.26 ‐0.25 ‐0.03 ‐0.04 0.03 0.10 0.13 0.13 ‐0.03 0.41 0.71 1.72 ‐0.17 0.02 0.24 0.20 0.10 0.48 0.52 0.29 ‐0.08 0.88 0.07 0.27 0.13 ‐0.85 ‐0.14 0.02 ‐0.36 0.14 ‐0.74 6.5119 7.7744 8,605 44.72 82.01 1,084 3.0133 43.174 1.2420 30.17 28.87 1.0632 6.5449 7.7827 8,744 45.04 82.05 1,102 3.0282 43.460 1.2580 30.37 29.10 1.0349 6.6082 7.7736 8,860 45.20 82.52 1,120 3.0674 43.649 1.2829 30.29 29.81 1.0069
Pricing Source: Bloomberg
Key Economic Events Over Next 24 Hours* 4:00 PM TA CPI YoY% 4:00 PM TA WPI YoY% 5:00 PM SI Foreign Reserves 5:30 PM MA Foreign Reserves NA PH Foreign Reserves NA ID Foreign Reserves NA ID Money Supply ‐ M1 (YoY) NA ID Money Supply ‐ M2 (YoY) NA ID Net Foreign Assets (IDR Tln) 7:00 AM SK GDP at Constant Price (QoQ) 7:00 AM SK GDP at Constant Price (YoY)
Period MAY MAY MAY 31‐May MAY MAY APR APR MAY 1Q F 1Q F
Cons Last Significance 1.64% 1.34% High 4.40% 4.53% High ‐ ‐ $242.52B Low ‐ ‐ $132.62B Low ‐ ‐ $67.8B Low ‐ ‐ $113.81B Low ‐ ‐ 17.40% Meidum ‐ ‐ 16.00% Medium ‐ ‐ 941.87T Medium ‐ ‐ 1.40% High ‐ ‐ 4.20% High
*indicated times are relative to GMT+8
GLOBAL FX STRATEGY
Tuesday, June 07, 2011
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