Economics & Strategy

DBS Flash
FX: DEER recommendations (November 2023)
Strategy/FX/Global

DBS Group Research November 6, 2023

30 Latest G10 DEER valuations

Chang Wei Liang
FX & Credit Strategist
G10 FX: DEER valuations

USD Over-valued 20.1

CHF 11.1

NZD 8.6

EUR 6.7
Please direct distribution queries to
Violet Lee +65 68785281 violetleeyh@dbs.com AUD 5.9

GBP -1.5
• The DEER Strategy recommends long
CAD -2.1
positions in JPY, CAD, and GBP, and
short positions in USD, CHF, and EUR. JPY -34.4 Under-valued

• The strategy posted a net loss of 1.7%
over the last 3 months, with the loss
from JPY outweighing gains from
other currencies.
• JPY under-valuation has reached at
an extreme level and further
downside could be limited by risks of
MOF intervention.
• The USD could also ease from its high
valuations with the Fed being non-
committal on rate hikes, while US
growth is also expected to slow.
• In Asia ex-Japan, MYR and CNY are
most under-valued, while PHP and
THB are most over-valued based on
our latest DEER valuations.
Source: IMF, CEIC, DBS As of 30 Oct
Across major G10 currencies, the JPY, CAD, and
GBP are the three most undervalued. JPY’s
undervaluation has widened yet again, with BOJ
making only a minimal change to introduce
ambiguity around its 1% upper limit for the 10Y
yield. The CAD’s undervaluation remains as
before. GBP has slipped back to being slightly
under-valued.
USD, CHF, and NZD are still the three most over-
valued among major G10 currencies. The USD’s
over-valuation has jumped, driven by stellar Q3
growth and job creation. CHF’s valuation has
narrowed after SNB kept rates on hold in Sep,
instead of tracking the ECB’s rate hike. The
NZD’s over-valuation has also eased with the
RBNZ expected to leave rates unchanged into
2025, though it sees a 40% chance of a further
25bps rate hike to 5.75% in 2024.

Refer to important disclosures at the end of this report.

FX: DEER recommendations (November 2023)
DEER Strategy Recommendations
DEER Strategy Recommendations
AUD CAD NZD CHF GBP EUR
06-Nov-23 + - + -
+' implies currency is a long and '-' implies that currency is a short
Source: DBS
Given no change in the ranking of DEER
valuations, our DEER strategy maintains longs
in JPY, GBP, and CAD. The JPY’s valuation
hovers at extreme lows, with the BOJ
maintaining YCC and negative interest rates.
The BOJ is still intervening to buy JGBs, with the
10Y yield rising towards 90bps and closing
towards its 1% upper reference limit. However,
the BOJ has also revised its core-core CPI
forecasts for both FY24 and FY25 to 1.9%, which
indicates that the Bank sees inflation as being
very close to a sustainable 2% pace. Further
progress on wage growth could prompt a
withdrawal of policy accommodation, in turn
supporting the JPY. Meanwhile, JPY downside
risks are also curbed with USD/JPY being close
to levels that implies a non-trivial risk of market
intervention by MOF (see JPY and RMB: Rising
risks of policy smoothing, 20 Oct 23).
CAD has softened, with the BOC holding rates
unchanged at 5% after two rate hikes in June
and July. The BOC sees evidence that supply and
demand are approaching a balance, and
expects a softening in growth going forward.
Still, job creation remains healthy, while
inflation is also expected to average around
3.5% until mid-2024. Concerns over the slow
progress towards price stability could see BOC
keeping rates higher for longer, while buoyant
oil prices add further to support the CAD.
GBP had softened with BOE keeping rates on
hold at 5.25% in both Sep and Nov. UK growth
has slowed in Q3, alongside a slowdown in
continental Europe. Vacancies have eased by
around 40k since June, but remain significantly
November 6, 2023
above pre-pandemic highs, and still indicate a
tight labour market. Governor Bailey has
JPY USD reiterated that monetary policy is likely to be
+ -
restrictive for an extended period, lending
support for the GBP.
Our strategy maintains shorts against USD,
CHF, and the EUR. The US economy had
outperformed expectations in Q3, in turn lifting
the USD. But the Fed has also turned less
committal to rate hikes, with Powell saying that
financial conditions had tightened amid a rise in
longer-term bond yields. After having held rates
unchanged at 5.50% for Sep and Nov, and with
non-farm payrolls now easing, market
expectations for an end to the Fed rate hike
cycle are increasing. This could temper USD
strength, especially if geopolitical tensions ease
as well.
The ECB stopped its rate hike campaign in
October, holding its deposit rate unchanged at
4%. ECB’s Lagarde said that the Euro Area
economies is likely to remain weak for the
remainder of the ear, while risks to growth are
also tilted to the downside. Indeed, the Euro
Area’s manufacturing PMI had stayed below 44
for 5 consecutive months already since Jun.
GDP also contracted by 0.1% q/q in Q3, while
inflation has eased to 2.9% y/y. Policy rates are
thus likely to have peaked for the Euro Area.
In Switzerland, the SNB surprised markets by
leaving its policy rate unchanged at 1.75% in
Sep, instead of following the ECB in hiking once
more. The SNB has lowered its inflation forecast
for end-24 and end-25 by 10bps to 2.1% and
1.9%. The manufacturing sector is seeing
headwinds, with the Swiss manufacturing PMI
coming in at 40.6 for Oct. Safe haven demand
amid Mid-East tensions has supported the CHF
of late, but the CHF may ease again if there is no
further escalation.
Page 2
FX: DEER recommendations (November 2023)
Recent DEER return breakdown and analysis
We review the returns of our previous DEER
recommendations made on 3 Aug 2023 (see
here). The returns are calculated based on
closing prices on 3 Nov 2023 vs forward prices
on 2 Aug 2023.
DEER constituents' returns (2 Aug - 3 Nov)
Interim Return (%)
Recommendation
USD Short - inception, while combined performance for the
CHF Short 3.5%
EUR Short 2.3%
CAD Long -2.4%
GBP Long -2.6%
JPY Long -5.8%
Net (Approx return) -1.7%
Source: Bloomberg, DBS
The strengthening USD has been the primary
driver of currency returns in the last three
months. Both our short CHF and short EUR
positions delivered a positive return of 3.5%
and 2.3% respectively. CHF weakened
significantly after SNB become more balanced
in its inflation outlook and held rates
unchanged. EUR has also weakened after the
ECB gave a dovish hike in Sep, signalling that it
could be at the end of its rate hike cycle.
Our CAD, GBP, and JPY longs against the USD
underperformed due to US strength. CAD has
softened after the BOC paused its rate hike
cycle, while m/m growth has also stagnated
since June. GBP has weakened as well amid
slowing inflation and a BOE rate pause, but it
remains the best performing G10 currency
year-to-date on a total return basis.
Finally, our JPY long posed an outsized 5.8%
loss, contributing to a 1.9% loss for the strategy.
The strategy’s return this quarter would have
been positive absent a drag from USD/JPY. JPY
weakness is still driven by large yield
differentials and heavy domestic bond
outflows. A JPY recovery could have to await
November 6, 2023
BOJ’s withdrawal from YCC and negative
interest rates, paving the way for a narrowing
of yield differentials given that other central
banks are now pausing rate hikes.
On an aggregated basis, our DEER strategy
posted a 1.7% loss from 2 Aug 2023 to 3 Nov
2023. JPY weakness is the largest contributor to
the underperformance of our strategy since
rest of the currencies was marginally positive.
Return comparison of DEER strategy since inception
Return since 3 Aug
Asset
2021 (%)
S&P 500 -6.9
Bloomberg Global HY Index -10.6
DEER Strategy -16.1
WGBI DM Short-term Bond Index -16.3
US 10y Treasury Bond -19.5
Bloomberg Global Agg IG Index -21.4
Source: DBS, Bloomberg (As of 27 Oct 2023)
Since inception, our DEER Strategy has
underperformed the S&P500 Index and the
global HY index, as risky assets benefit from
lower US recession risks. It still outperforms the
DM short-term bond index, the US 10y
Treasury, as well as the global IG credit index.
DEER strategy weekly returns' correlation since inception
Asset DEER S&P 500
S&P 500 Index 0.20 --
Bloomberg Global IG Bond Index 0.33 0.48
Bloomberg Global HY Bond Index 0.29 0.73
Source: DBS, Bloomberg
In our correlation analysis, the DEER strategy
shows small correlations (between 0.20 to 0.33)
with equity and bond assets, proxied by the S&P
500 and the Bloomberg Global Aggregate Bond
Index. Low correlations against traditional
assets implies that the DEER Strategy can offer
a valuable diversification benefit for most
portfolios. Currency strategies can provide
diversification, especially as bonds and equities
are now showing greater correlations in returns
(between 0.48 to 0.74).
Page 3
FX: DEER recommendations (November 2023) November 6, 2023

Latest Asian ex-Japan DEER valuations deal with inflation risks. THB’s over-valuation
has been steadily narrowing, partly due to
Asian FX: DEER valuations
political uncertainty with a difficult formation of
USD Over-valued 20.1 the government post elections. Thailand is no
PHP 13.6
governed by a coalition led by PM Srettha from
Pheu Thai, with the support of military-backed
THB 8.0
parties which are historic rivals.
INR 1.3
MYR and RMB remain the two most under-
IDR -1.9 valued Asian currencies. The extremely under-
KRW -2.7 valued MYR may not prompt BNM to tighten
policy, but the good news is that growth has
CNY -14.1
picked up to 3.3% for Q3. Meanwhile, the RMB
MYR -17.2 Under-valued is also stabilizing amid a clear policy bias to
Source: IMF, CEIC, DBS support RMB via consistently strong onshore
CNY fixings, and a tightening of offshore RMB
For Asian ex-Japan currencies, PHP and THB are liquidity. Sustained RMB depreciation looks
still the two most over-valued. The PHP’s over- unlikely given policy asymmetry.
valuation has only narrowed slightly, with the
BSP opting for an off-cycle rate hike in Oct to

Page 4
FX: DEER recommendations (November 2023) November 6, 2023

Group Research
Economics & Strategy

Taimur BAIG, Ph.D.

Chief Economist
Global
taimurbaig@dbs.com

Wei Liang CHANG Teng Chong LIM Joel SIEW

FX & Credit Strategist Credit Analyst Credit Analyst
Global SGD Credit SGD Credit
weiliangchang@dbs.com tengchonglim@dbs.com joelsiew@dbs.com

Nathan CHOW Tieying MA, CFA Duncan TAN

Senior Economist Senior Economist Rates Strategist
China, Hong Kong SAR Japan, South Korea, Taiwan Asia
nathanchow@dbs.com matieying@dbs.com duncantan@dbs.com

Han Teng CHUA, CFA Radhika RAO Mervyn TEO

Economist Senior Economist Credit Strategist
Asean Eurozone, India, Indonesia USD Credit
hantengchua@dbs.com radhikarao@dbs.com mervynteo@dbs.com

Violet LEE Amanda SEAH Samuel TSE

Associate Credit Analyst Economist
Publications SGD Credit China, Hong Kong SAR
violetleeyh@dbs.com amandaseah@dbs.com samueltse@dbs.com

Eugene LEOW Daisy SHARMA Philip WEE

Senior Rates Strategist Analyst Senior FX Strategist
G3 & Asia Data Analytics Global
eugeneleow@dbs.com daisy@dbs.com philipwee@dbs.com

Page 5
FX: DEER recommendations (November 2023) November 6, 2023

Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts
and transformations)

GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates)

The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the
“Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial
Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional
Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained
from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied,
as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to
change without notice. This research is prepared for general circulation. Any recommendation contained herein does
not have regard to the specific investment objectives, financial situation and the particular needs of any specific
addressee. The information herein is published for the information of addressees only and is not to be taken in
substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The
Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct,
special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the
information herein (including any error, omission or misstatement herein, negligent or otherwise) or further
communication thereof, even if the Company or any other person has been advised of the possibility thereof. The
information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures,
options or other financial instruments or to provide any investment advice or services. The Company and its associates,
their directors, officers and/or employees may have positions or other interests in, and may effect transactions in
securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or
financial services for these companies. The information herein is not directed to, or intended for distribution to or use
by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction
(including but not limited to citizens or residents of the United States of America) where such distribution, publication,
availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an
offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an
offer or solicitation would be contrary to law or regulation.

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial
Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd
may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to
an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS
Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888.
Company Registration No. 196800306E.

DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99
Queen’s Road Central, Central, Hong Kong SAR.

DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 13th Floor One Island East,
18 Westlands Road, Quarry Bay, Hong Kong SAR
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product
approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime
does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in
such transactions, the investor should carefully assess the risks, and seek its own independent advice.

Page 6