20180720-大华银行-Macro+FX_Strategy_Brace_For_More_Asian_FX_Weakness_8页_335kb

Summary of "Macro + FX Strategy: Brace For More Asian FX Weakness"

Core Content

This report discusses the intensifying weakness in Asian currencies against the US Dollar (USD) in the second half of 2018. The authors, from UOB Group, analyze the macroeconomic and financial factors that are contributing to this trend and update their forecasts for the future performance of key USD/Asia currency pairs.

Main Points

• USD/Asia Weakness Intensifies: The authors anticipated a "Year of two halves" for USD/Asia, with Asian currencies weakening in the second half of the year. However, the recent sell-off has been more severe than expected, with many USD/Asia spot rates already surpassing their year-end forecasts.

• US Inflation and FED Policy: US inflation indicators have risen above the 2% target, reinforcing the FED's rate hiking cycle. FED Chair Jerome Powell has expressed confidence in the US economy and has reiterated the need for gradual rate hikes, which supports USD strength.

• US-China Trade Tensions: Escalating trade tensions have dampened Asian export growth, especially in China and Singapore. The authors note that this is likely to have a more pronounced impact in 2019, depending on further trade measures and responses.

• Yield Spread and ADXY: The Asia Dollar Index (ADXY) has fallen in line with the weakening yield spread between Asian benchmarks and US Treasuries. The PBoC's monetary easing has contributed to this trend, leading to a broader sell-off in Asian currencies.

• PBoC and CNY Depreciation: The PBoC appears to be allowing the CNY to weaken more freely, with the USD/CNY rate rising and the CFETS RMB Index expected to fall significantly. This suggests a shift in policy that may lead to further depreciation of the CNY.

• Regional Currency Forecasts: The report updates forecasts for several key Asian currencies, indicating continued USD strength against them. The USD/CNY is expected to rise to 6.95 by end-2018 and 7.10 by mid-2019. Similarly, USD/TWD and USD/KRW are projected to fall to 32.00 and 1,180 by mid-2019, respectively. For South East Asia, the MYR, THB, and IDR are also expected to weaken, though to a lesser extent.

• SGD and MAS Policy: The SGD is expected to remain within a range of 1.35 to 1.40, with a forecast of 1.39 by end-2018 and 1.41 by mid-2019. The MAS is maintaining a mildly appreciating S$NEER basket, which limits the SGD's weakness.

• Key Risks: The report highlights the risk of further USD/Asia weakness if US-China trade relations deteriorate. Conversely, if a compromise is reached, some recovery in Asian currencies could occur. The underlying trend, however, remains bullish for the USD due to the FED's rate hiking cycle.

Key Information

• USD/CNY: Expected to rise to 6.95 by end-2018 and 7.10 by mid-2019.
• USD/SGD: Forecast to rise to 1.39 by end-2018 and 1.41 by mid-2019.
• USD/TWD: Projected to reach 32.00 by mid-2019.
• USD/KRW: Expected to rise to 1,180 by mid-2019.
• USD/IDR: Anticipated to rise to 14,900 by mid-2019.
• USD/THB: Projected to rise to 34.30 by mid-2019.
• USD/MYR: Forecast to reach 4.12 by mid-2019.
• USD/MMK: Expected to rise to 1,470 by mid-2019.
• USD/VND: Projected to reach 23,600 by mid-2019.
• USD/INR: Anticipated to rise to 70.80 by mid-2019.

Updated FX Forecast Table

Key Risks to Forecasts

• US-China Trade Tensions: Further escalation could lead to an earlier-than-expected drop in USD/CNY and USD/SGD.
• FED Rate Hikes: The FED is expected to continue its gradual rate hiking cycle, supporting USD strength.
• Regional Policy Responses: Central banks in Malaysia, Indonesia, and Thailand may implement policies to limit currency weakness, but the overall trend remains negative for Asian currencies.

Conclusion

The report concludes that Asian currencies are expected to weaken further against the USD in the coming months due to a combination of factors, including strong US growth, rising inflation, FED rate hikes, and the impact of US-China trade tensions. The PBoC's apparent shift towards allowing more CNY depreciation is a key driver, with the CFETS RMB Index expected to fall significantly. While some currencies like SGD and THB may experience less severe weakness due to policy interventions, the overall outlook for USD/Asia remains bearish.