2021 fx outlook · 2014. 12. 20. · 3mma source: bloomberg, ocbc 5 • …but the market cannot...

2021 FX Outlook:USD weakness the baseline, but let’s not be overconfident

14 Dec 2020

Treasury Research & Strategy

Global Treasury

Terence Wu

(+65) 6530-4367

[email protected]

1

Summary of views:

Macro environment:

• The major exogenous assumption is that the vaccine progress will remain on track, allowing continued background risk-

on sentiment and growth normalization. Increasing market confidence in the recovery leads to the lifting of back-end

yields. The question will be whether the US will be perceived as a leader in this global recovery.

G-10 FX:

• The USD to remain under pressure on risk dynamics in 1Q 2021 as the market continues to focus on vaccine-related

positivity and policy support for the economy. Structural impediments to the USD – twin deficits, FX reserve

diversification – are unlikely to be alleviated.

• However, the extent of USD weakness should be questioned. USD positives are growing – steady US recovery, Fed not

the most dovish, UST yields leading global back-end yields higher – but remain under the radar. Watch for potential

turning points that may shift market focus – Fed turning less dovish due to consistent recovery – for example.

• EUR strength against the USD is not backed outperformance in the macro and equity space. This should leave us

skeptical about excessive EUR strength. Risk-related USD weakness should see less impact on USD-JPY, but a

structural positive in play for the JPY in the form of compressed yield differentials. AUD supported on risk dynamics, but

structural issues weigh negatively.

2

Summary of views:

3

EM Asia FX:

• Positive RMB drivers – on-track macro recovery, supportive real yields and PBOC tolerance – should persist into 2021,

leaving us comfortable to expect further RMB strength. However, this view also assumes that Sino-US relations will turn

more conventional. On balance, the RMB should continue to lead Asian currencies higher.

• Portfolio inflows should also step up as a positive driver for Asian currencies. The preconditions – supportive real yields,

light foreign positioning, undemanding FX valuations – should continue to mature into 2021.

• Potential for portfolio inflows to rotate to South Asia as growth recovery broadens beyond the export sector and if real

yields stay supported. In this context, there remains room for the likes of IDR and MYR to catch up in terms of

appreciation, given that the official climate is more welcoming of local currency strength.

Macro backdrop: Pace of recovery is uneven globally,

and in fits and stops due to virus resurgence

4Source: Bloomberg, OECD, OCBC

30.0

35.0

40.0

45.0

50.0

55.0

60.0

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

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1

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6mma

Global PMIs

US PMI JP PMI EZ PMI EM PMI

-6.0

-5.0

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-3.0

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12m %chg

Global CLIs

US CLI EZ CLI JP CLI Asia: Major 5 CLI

• Certain sectors of the economy are adjusted to co-existing with COVID-19, and market sensitivity to new pandemic-

related headlines have largely faded. Yet, all is not normal, and the hope in 2021 is on the vaccines to allow for further

normalization.

US: (Potentially) the fastest recovery from a recession

after the steep decline…

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Initial Jobless Claims (6m change)

NBER defined recession US Initial Jobless Claims (6m change)

'000s

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ISM Man. and non-Man Indices

NBER defined recession ISM Man. PMI ISM non-Man. PMI

3mma

5Source: Bloomberg, OCBC

• …but the market cannot seem to shake off underlying pessimism about the US rebound. The Fed has consistently

focused on the uncertainties and the call for more fiscal stimulus. This may have contributed to the pessimism.

• However, note that the tone of Fed rhetoric is (very) slowly improving. Data-wise, the US has also been outperforming

other economic regions. Do not rule out the possibility of a US macro exceptionalism storyline in 2021.

Global recovery now led by China and US; Europe

faltered after early hopes, Asia (ex. China) lagging

-60

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OCBC US Macro Surprise Diffusion Index

3M MSI

+ve data surprises

-ve data surprises

-80

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OCBC EZ Macro Surprise Diffusion Index

3M MSI

+ve data surprises

-ve data surprises


-60

-40

-20

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20

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80

Jan-1

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Jul-13

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Jul-15

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Jan-1

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Jul-19

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Jul-20

OCBC Asia (ex China) Macro Surprise Diffusion Index

3M MSI

-ve data surprises

+ve data surprises

-15

-10

-5

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OCBC China Macro Surprise Diffusion Index

3M MSI

+ve data surprises

-ve data surprises

Asia: North Asia outperforms South in terms of macro

recovery

20.0

25.0

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65.0

Jan-0

8

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9

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Asian PMIs (monthly)

EM PMI CN SK TW SG

25.0

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Jan-0

8

Jul-0

8

Jan-0

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Asian PMIs (monthly)

IN TH MY PH ID


• Taking PMIs as an overall gauge, the North Asian economies saw a shallower dip at the early stages (even though they

were first hit by the pandemic). The subsequent recovery also outpaced the South, especially since 3Q 2020 onwards.

• Political uncertainties in some South Asian economies weigh on the recovery.

Asia: Export sector driving rebound, but imports still

weak – domestically-focused economies disadvantaged

8

-2.5

-2.0

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Jan-1

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Jan-1

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Jan-2

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Jul-2

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Z-score(3mma)

Asian aggregate (Exports)

CN Asia (ex-CN, JP)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan-0

8

Jul-0

8

Jan-0

9

Jul-0

9

Jan-1

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Jul-1

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Jan-1

1

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Jan-1

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Z-score(3mma)

Asian aggregate (Imports)

CN Asia (ex-CN, JP)

Source: Bloomberg, CEIC, OCBC

• EM Asian exports picked up sharply in 3Q 2020, in-line with global economies lifting the initial rounds of the pandemic-

related lockdowns and reopening their economies. Imports, though, remains listless, suggesting that domestic

consumption and businesses still having a weak 2H 2020.

• The baseline expectation is for an eventual broadening of the recovery in 2021. However, the more immediate concern

is the resurgence in pandemic cases, which may jeopardize this export-led recovery in 1Q 2021.

Inflation expectations turning supported – should not be

overly pessimistic on the macro outlook


-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan-1

5

Apr-

15

Jul-1

5

Oct-

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Jan-1

6

Apr-

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Jan-1

7

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Jul-1

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Oct-

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Jan-1

8

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Jul-1

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Jan-1

9

Apr-

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Jul-1

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Jul-2

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Oct-

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%

Global 10y Breakevens

US GE JP UK CA AU

• Committed stimulatory firepower from the central banks and governments (that have not shown any signs of pullback)

provide hope for a firm recovery. Supported back-end break-evens suggest the market has conviction in that view. This

has translated, in part, to an uplift in back-end yields in the DM markets.

One huge exogenous assumption: Vaccine(s) to the

rescue in 2021

10

• The vaccine-driven normalization is an overriding theme for this outlook (and perhaps in most other 2021 outlooks),

both in the near-term and into 2H 2021. It must be said that this is, at best, an exogenous assumption that has been

taken to be true ex-ante. We have assumed that the challenges related to the vaccine, such as (1) efficacy and safety,

(2) availability, and (3) uptake, among others, will be successfully overcome in 2021.

• The first hurdle, efficacy and safety, appears to be on the cusp of being overcome. At least three vaccines

(Pfizer/BioNTech, Moderna and AstraZeneca) at least appear to show good results in the trial stages. At the time of

writing, the UK has approved the Pfizer vaccine for emergency use, thereby showing that safety concerns have been

addressed.

• The next two challenges of availability and uptake will need to be tackled next. Availability will be a function of supply

chain dynamics and logistics, while uptake will be largely a moral and public confidence issue. At this juncture, the

market appear confident that these challenges will eventually be overcome, without seriously questioning

them. Thus, it gives the sense that the market is underpricing the inherent risks associated with these challenges.

Should this confidence be shaken, expect the outlook ahead to be severely compromised.

Overview of 2020: Broad-based USD weakness after the

initial pandemic scare

11

INR IDR THB MYR SGD TWD KRW PHP CNH

Year-to-date -3.24 -1.83 -0.89 0.34 0.49 4.90 5.06 5.41 6.19

Quarter-to-date 0.00 5.43 5.06 2.36 2.51 2.79 8.09 0.95 4.03

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

EM Asia FX YTD Performance

%

CAD GBP JPY NZD AUD EUR

Year-to-date 0.51 0.78 3.84 4.81 5.16 7.52

Quarter-to-date 3.59 4.13 1.55 6.76 3.77 3.75

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

G-10 FX YTD Performance

%

Source: Bloomberg, OCBC

• After the initial shake-out in March, USD-centric dynamics overwhelmed domestic issues for G10 pairs, leading the

broad USD lower. G10-USD correlations are elevated.

• North Asian FX outperformance seen in Asia (save PHP), led by the RMB complex, on the back of better pandemic

management and faster export-led recovery.

Front-loaded USD weakness in 1Q 2021 on risk

dynamics still the base case


• Underlying market sentiment still tilts positive (as seen through the FX Sentiment Index), as market waves off pandemic

resurgence in favour of vaccine progress and fiscal/monetary support. Risk-on / weak-USD dynamic well and alive.

• Cross-asset correlations remain elevated. Supported global equities also depress the broad USD.

-1.00

-0.80

-0.60

-0.40

-0.20

0.00

0.20

0.40

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0.80

1.00

Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20

USD TWI 1m correlation with other asset classes

UST 10y yield S&P 500 STOXX 50 MSCI EM Gold

90.00

92.00

94.00

96.00

98.00

100.00

102.00

104.00

-2.00

-1.50

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-0.50

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0.50

1.00

1.50

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2.50

3.00

3.50

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Jan

-20

Feb

-20

Ma

r-20

Ap

r-2

0

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0

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FX Sentiment Index (RHS) USD WTI

z-score

Risk-off zone

Risk-on zone

Risk-neutral zone

Growth normalization theme weighs on the USD on a

structural basis

13Source: Bloomberg, OECD, OCBC

-15

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-5

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6mma %yoy(inverse scale)

%yoy

OECD Leading Indicator USD Trade Weighted Index (RHS)

-12.0

-7.0

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-40

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6mma % yoy(inverse scale)

% yoy

Global Man PMI USD Trade Weighted Index (RHS)

• Vaccines and better pandemic management may be expected drive a more structural recovery in global growth,

especially into 2H 2021. This sustained recovery off lows should put pressure on the USD – unless the market

perceives the recovery to be US-led.

Twin deficits, decline in USD share of global FX reserves

also structural negatives for the USD


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70.00

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US Twin deficits drag on USD

DXY Curncy US Twin Deficits (% of GDP, RHS)

60.00

61.00

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65.00

66.00

67.00

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USD as % of total FX holdings

• More fiscal support measures out of the US will only worsen the fiscal deficit situation in the US, and increase the

negative weight on the USD on a structural basis. The ongoing decline in the USD’s share in global FX reserves also

reduce demand for USD relative to other currencies – yet more structural negatives for the USD.

However, need to be circumspect about the extent of

USD weakness from here; G10 FX no longer undervalued

15Source: BIS, Bloomberg, OCBC

85

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EUR REER

EUR REER 3-year average

85

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125

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CHF REER

CHF REER 3-year average

90

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135

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GBP REER

GBP REER 3-year average

70

75

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85

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115

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Jan-

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AUD REER

AUD REER 3-year average

70

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CAD REER

CAD REER 3-year average

60

65

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110

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-07

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JPY REER

JPY REER 3-year average

• Undervaluation of G-10 FX in REER terms at the start of 2020 has been recovered, leaving most G-10 FX fairly valued

structurally. Overvaluation within the European complex already starting to set in.

Next round of balance sheet expansion underway at

major central banks; Fed is not leading the pack


70.0

75.0

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105.0-40.00

-20.00

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US Excess Liquidity vs DXY

US Excess Liquidity (LHS) DXY Curncy

yoy% 3m lead

Reverse scale

-80.00

-60.00

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

-0.25

-0.20

-0.15

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EUR-USD Fed-ECB B/S growth differential (% of GDP, RHS)

yoy%, 3m lagyoy%

• With the RBA and ECB taking further easing action in 4Q 2020, the Fed is no longer the most dovish in the spectrum.

• Admittedly, given the coordinated nature of monetary accommodation, relative central bank dynamics may be less of a

driver. Recent dynamics even suggest easing actions are a near-term positive for the relevant currency. Nevertheless,

this counter-intuitive dynamic cannot persist, and should revert once there are hints of a pull-back in monetary support.

Back-end yield compression weighed on the USD, but

this dynamic should have run its course


• Treasury yields have been, and should continue, leading core back-end yields higher – a USD-positive in theory. But the

UST curvature has been the dominant driver, with a steeper UST curve strongly correlating with a weaker USD.

• Risk is for the US recovery to gain enough traction for the Fed to tilt less dovish and hint at a pull-back of

policy support. Front-end yields may then lift, and the flattening of the curve turns supportive for the USD.

88

90

92

94

96

98

100

102

104

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

Ja

n-1

7

Ap

r-17

Ju

l-1

7

Oct-

17

Ja

n-1

8

Ap

r-18

Ju

l-1

8

Oct-

18

Ja

n-1

9

Ap

r-19

Ju

l-1

9

Oct-

19

Ja

n-2

0

Ap

r-20

Ju

l-2

0

Oct-

20

10y rate differentials vs. USD

USD weighted interest rate differential DXY INDEX

Rate Gap (%) 88

90

92

94

96

98

100

102

104-20.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Ja

n-1

7

Ap

r-17

Ju

l-1

7

Oct-

17

Ja

n-1

8

Ap

r-18

Ju

l-1

8

Oct-

18

Ja

n-1

9

Ap

r-19

Ju

l-1

9

Oct-

19

Ja

n-2

0

Ap

r-20

Ju

l-2

0

Oct-

20

UST 2-10 yield spread vs. USD

US 2-10 Yield Spread DXY INDEX

Inverse scale

USD not reacting to the US data that is consistently

outperforming estimates


• Despite the cautious rhetoric by the Fed, the US recovery appears to have traction and should not be dismissed too

easily. USD may turn supported if this contrast (with EZ macro performance) regains market focus. A shift in Fed

rhetoric may be the turning point – watch inflation as a potential early indicator of this. Outside chance of the

new Treasury Secretary re-emphasizing on strong-USD policy.

-20

-15

-10

-5

0

5

10

15

20

25-120

-100

-80

-60

-40

-20

0

20

40

60

80

100

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

Jan-1

9

Jan-2

0

% yoy

US Macro Surprise Index vs trade-weighted USD

6M MSI USD TWI (%yoy, RHS)

-ve data surprises

-ve data surprises

0

10

20

30

40

50

60

70

80

90

100

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Jan

-90

Jan

-91

Jan

-92

Jan

-93

Jan

-94

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

Jan

-18

Jan

-19

Jan

-20

US inflation gauges

NBER declared recession CPI YOY Index PCE CYOY Index

%

EUR-USD: USD weakness drives the pair lower in the

near term – not worthwhile to fight it

19

• The EU fiscal recovery fund represented a political breakthrough, lifting any implied EU break-up risk premium on the

EUR. This gave the EUR-USD a domestic tailwind in 2020, in addition to the broad USD weakness.

• Short-term players still heavily positioned for EUR strength. The recent pull-back in positioning is gradual, and already

stalling. Expected 1Q 2021 USD weakness leaves little motivation for resisting EUR appreciation in the near term.

1.00

1.04

1.08

1.12

1.16

1.20

1.24

Dec-1

8

Fe

b-1

9

Apr-

19

Jun-1

9

Aug

-19

Oct-

19

Dec-1

9

Fe

b-2

0

Apr-

20

Jun-2

0

Aug

-20

Oct-

20

EUR-USD short term implied valuations

Actual Fitted

1.02

1.12

1.22

1.32

1.42

1.52

1.62

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

Jan-1

9

Jan-2

0

CFTC non-commercial account positioning

EUR Positioning EUR-USD

EUR Longs

EUR Shorts

Z score

EUR-USD: But gains eventually need to be backed by

outperformance in EZ – not forthcoming for now

20

• The European recovery post-pandemic has effectively stalled relative to the US. EZ equities also underperforming their

US counterparts. In this context, EUR strength against the USD looking like an exception after than the norm.

• This leaves us to question the sustainability of the gain, and how much further can the EUR extend against the

USD in the medium-term horizon. Near term however, there is still room for the EUR-USD to extend further.

-100

-80

-60

-40

-20

0

20

40

60

80

100

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

Jan-1

3

Jul-1

3

Jan-1

4

Jul-1

4

Jan-1

5

Jul-1

5

Jan-1

6

Jul-1

6

Jan-1

7

Jul-1

7

Jan-1

8

Jul-1

8

Jan-1

9

Jul-1

9

Jan-2

0

Jul-2

0

Jan-2

1

6m%

EUR-USD 3M Rel MSI (6M Lead, RHS)

US macro data underperform against EZ

US macro dataoutperformagainst EZ

-30.00%

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

-30.00%

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

Jan-1

4

Jul-1

4

Jan-1

5

Jul-1

5

Jan-1

6

Jul-1

6

Jan-1

7

Jul-1

7

Jan-1

8

Jul-1

8

Jan-1

9

Jul-1

9

Jan-2

0

Jul-2

0

Jan-2

1

EUR-USD (%yoy)

EU-US relative 12m equity performance (6m lag, RHS)

US equitiesunderperform against EZ

US equitiesoutperform against EZ

USD-JPY: Slow grind lower, but the pair has mostly lost

its traditional role as a risk proxy

21

• Compression in yield differentials between JGBs and other DM government bonds may be a structural positive for the

JPY. Even though the differentials have started to widen again, the USD-JPY remains heavy. This suggests that the

initial dynamic has yet to run its course.

• Downward move for the pair, however, has been a slow grind, as the underlying risk-on environment (exerting an

implicit upward pressure), offsets the USD weakness.

102.00

104.00

106.00

108.00

110.00

112.00

114.00

Dec-1

8

Fe

b-1

9

Apr-

19

Jun-1

9

Aug

-19

Oct-

19

Dec-1

9

Fe

b-2

0

Apr-

20

Jun-2

0

Aug

-20

Oct-

20

USD-JPY short term impled valuations

Actual Fitted

-1.00

-0.80

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

Jan

-17

Apr

-17

Jul-

17

Oct

-17

Jan-

18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Apr

-19

Jul-

19

Oct

-19

Jan-

20

Apr

-20

Jul-

20

Oct

-20

USD-JPY 2m correlations with equities

vs. S&P 500 vs. Nikkei 225

USD-JPY: Japanese outflows not severely impinged by

the lower foreign yield differentials, picking up again

22

• Outflow momentum from onshore Japanese accounts has started to pick up again. This dynamic is traditionally tied to a

softer USD-JPY.

• Overall, the bias for the USD-JPY to experience consistent, albeit modest, downside pressure in 2021, allow a

drift towards to 102.00.

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30-15000

-10000

-5000

0

5000

10000

15000

20000

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Japanese purchase of foreign bonds vs USD-JPY

Outflows USD-JPY (RHS)

JPY bn, 24-wk RS USD-JPY 6m%inverse scale

102

104

106

108

110

112

114

116

118

120

0.2

0.7

1.2

1.7

2.2

2.7

3.2

Jan-1

7

Apr-

17

Jul-17

Oct-17

Jan-1

8

Apr-

18

Jul-18

Oct-18

Jan-1

9

Apr-

19

Jul-19

Oct-19

Jan-2

0

Apr-

20

Jul-20

Oct-20

10y US-JP rate differentials vs. USD-JPY

US-JP 10y rate differentials USDJPY Curncy

%

AUD-USD: Positive risk environment and a firming

commodity complex support

23

• Unlike the USD-JPY, the AUD-USD has remained highly sensitive to global risk cues and correlated to global equities.

This should leave the pair supported early-2021. Further out, the firming commodity complex and growth

normalization also supports. However, a list of negatives for the AUD should keep a lid on excessive gains.

0.55

0.58

0.61

0.64

0.67

0.70

0.73

0.76

Dec-1

8

Fe

b-1

9

Apr-

19

Jun-1

9

Aug

-19

Oct-

19

Dec-1

9

Fe

b-2

0

Apr-

20

Jun-2

0

Aug

-20

Oct-

20

AUD-USD implied valuation model

Actual Fitted

500

600

700

800

900

1000

1100

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

AUD-USD CRB METL Index (RHS)

AUD-USD: List of structural negatives not short – Sino-

Australian trade issues, dovish RBA, yield compression

24

• The immediate wildcard risk is Sino-Australian trade relations, with China piling on import taxes on an increasing range

of Australian exports – however, the market may be willing to overlook this so long as iron ore is not affected.

• Further out, the RBA has effectively tracked the Fed in adopting average inflation targeting. Relative central bank

dynamics may have an increasing impact deeper into the growth normalization. Collapse of policy rates and yields

across the DM space also makes it increasingly cheap to be short on the AUD.

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.1515.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

55.00

60.00

65.00

Ma

r-08

Sep

-08

Ma

r-09

Sep

-09

Ma

r-10

Sep

-10

Ma

r-11

Sep

-11

Ma

r-12

Sep

-12

Ma

r-13

Sep

-13

Ma

r-14

Sep

-14

Ma

r-15

Sep

-15

Ma

r-16

Sep

-16

Ma

r-17

Sep

-17

Ma

r-18

Sep

-18

Ma

r-19

Sep

-19

Ma

r-20

Sep

-20

RBA Balance Sheet (%/GDP, LHS) AUD CURNCY

Reverse scale

%

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

Jan-

10

Jul-

10

Jan-

11

Jul-

11

Jan-

12

Jul-

12

Jan-

13

Jul-

13

Jan-

14

Jul-

14

Jan-

15

Jul-

15

Jan-

16

Jul-

16

Jan-

17

Jul-

17

Jan-

18

Jul-

18

Jan-

19

Jul-

19

Jan-

20

Jul-

20

AUD-USD 3M Forward Implied Yield

USD-Asia: Strong move lower since 2Q 2020, initial

conditions going into 1Q 2021 look positive


• Aside persistent USD weakness, Asian FX were also supported by an export-led macro recovery since 3Q 2020 and a

return of inflows in 4Q 2020. Acceleration in FX reserve accumulation suggest attempts to manage this appreciation.

• Into 1Q 2021, the environment looks increasingly favourable for Asian FX, with an on-track economic recovery in N.

Asia and a more conventional Sino-US relationship likely spurring a consistent stream of portfolio inflows.

108

110

112

114

116

118

120

122

Dec-1

5

Jun-1

6

Dec-1

6

Jun-1

7

Dec-1

7

Jun-1

8

Dec-1

8

Jun-1

9

Dec-1

9

Jun-2

0

Dec-2

0

Asian Currency Index (ACI) implied valuation model

Actual Predicted

WeakerAsian FX

StrongerAsian FX

-15.00%

-12.00%

-9.00%

-6.00%

-3.00%

0.00%

3.00%

6.00%

9.00%

12.00%

15.00%

Jan-

12

Jul-

12

Jan-

13

Jul-

13

Jan-

14

Jul-

14

Jan-

15

Jul-

15

Jan-

16

Jul-

16

Jan-

17

Jul-

17

Jan-

18

Jul-

18

Jan-

19

Jul-

19

Jan-

20

Jul-

20

yoy% change in total foreign reserves

Asia (ex CN) Total China

Asian FX (TWD, INR excepted) not overvalued in REER

terms; MYR and IDR most undervalued

26Source: Bloomberg, BIS, OCBC

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

Jan

-05

Jul-

05

Jan

-06

Jul-

06

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

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

KRW REER: Deviation from average

% Deviation from 3-year average

%

-20

-15

-10

-5

0

5

10

15

20

Jan

-05

Jul-

05

Jan

-06

Jul-

06

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

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

IDR REER: Deviation from average


%

-15

-10

-5

0

5

10

Jan

-05

Jul-

05

Jan

-06

Jul-

06

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

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

INR REER: Deviation from average


%

-20

-15

-10

-5

0

5

10

Jan

-05

Jul-

05

Jan

-06

Jul-

06

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

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

MYR REER: Deviation from average


%

• Most South Asian FX still undervalued fundamentally on an historical basis, leaving room for further appreciation bias.

-10

-5

0

5

10

15

20

25

Jan

-05

Jul-

05

Jan

-06

Jul-

06

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

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

THB REER: Deviation from average


%

-10

-8

-6

-4

-2

0

2

4

6

8

Jan

-05

Jul-

05

Jan

-06

Jul-

06

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

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

TWD REER: Deviation from average


%

North Asia leads in both macro and FX recovery, but room

for South Asia should catch up


-12.0

-8.0

-4.0

0.0

4.0

8.0

12.0

16.0

20.0-1.6

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

Jan-1

9

Jan-2

0

% yoyinversed

Z-score3mma

N. Asia Exports ACI (RHS)

Weaker USD

Stronger USD-1.00

-0.80

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

Jan

-20

Feb

-20

Ma

r-20

Ap

r-2

0

Ma

y-2

0

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

De

c-20

40-day Correlation with RMB

KRW Curncy TWD Curncy SGD Curncy

THB Curncy MYR Curncy IDR Curncy

• USD-Asia caught in the slipstream of USD-CNH’s decline – a move that can be sustained in the medium term.

• Perhaps not surprising that the export-focused North Asia outperformed in 2020. Under the baseline expectation that

the recovery will broaden out to the laggard domestic sectors, do not rule out a rotation in favour of the South Asian

economies into 2021.

Medium term RMB-positive drivers to persist, providing a

tail-wind for the rest of Asian FX


90

91

92

93

94

95

96

97

98

99

100

101

102

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

Oct

-19

Jan

-20

Ap

r-2

0

Jul-

20

Oct

-20

31/12/2014=100

CFETS RMB Index6.10

6.30

6.50

6.70

6.90

7.10

7.30-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Jan-1

5

Jul-1

5

Jan-1

6

Jul-1

6

Jan-1

7

Jul-1

7

Jan-1

8

Jul-1

8

Jan-1

9

Jul-1

9

Jan-2

0

Jul-2

0

China real yields vs RMB

10y real yield (LHS) CNH Curncy

%Reverse

scale

• The macro recovery in China remains on-track, and garners market confidence. Path of least resistance for Chinese

real yields remains higher on the back of both supported nominal yields and easing inflationary pressures. The CFETS

RMB Index not looking extended despite the USD-CNY extension lower.

• The PBOC also does not look intent on reining in RMB strength. Barring geopolitical risk events with the new Biden

administration, expect structural RMB strength to persist, with the USD-CNY edging progressively lower.

Besides the RMB, portfolio inflows may provide the next

leg of Asian FX strength

29Source: Bloomberg, CEIC, OCBC

-40000

-30000

-20000

-10000

0

10000

20000

30000

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

Oct

-19

Jan

-20

Ap

r-2

0

Jul-

20

Oct

-20

Asian aggregate portfolio flows (20D Rollsum)

Equity Bond

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

De

c-16

Feb

-17

Ap

r-1

7

Jun

-17

Au

g-1

7

Oct

-17

De

c-17

Feb

-18

Ap

r-1

8

Jun

-18

Au

g-1

8

Oct

-18

De

c-18

Feb

-19

Ap

r-1

9

Jun

-19

Au

g-1

9

Oct

-19

De

c-19

Feb

-20

Ap

r-2

0

Jun

-20

Au

g-2

0

Oct

-20

Total Portfolio Flows (20D RS) ACI (RHS)

z-score4wk MA

1m%Stronger Asia FX

Weaker Asia FX

• Light foreigner holdings, supportive real yield advantage, local currency not overvalued – these preconditions has been

maturing. The Biden victory likely removed a key uncertainty for Asia, and served as the impetus for the flows to return.

• Tech-heavy North Asian equities and Indian equities are the first beneficiaries. Unsurprising due to the equity bull run

and the export-led recovery.

Despite tentative return of flows, foreign positioning still

relatively light, especially in South Asia (ex. India)

30

-10,000.00

0.00

10,000.00

20,000.00

30,000.00

40,000.00

50,000.00

60,000.00

Jan

Feb

Ma

r

Ap

r

Ma

y

Jun

Jul

Au

g

Sep

Oct

No

v

De

c

Korea - Yearly cumulative flows

2013 2014 2015 2016

2017 2018 2019 2020

-30,000.00

-25,000.00

-20,000.00

-15,000.00

-10,000.00

-5,000.00

0.00

5,000.00

10,000.00

15,000.00

20,000.00

Jan

Feb

Ma

r

Ap

r

Ma

y

Jun

Jul

Au

g

Sep

Oct

No

v

De

c

Taiwan - Yearly cumulative flows

2013 2014 2015 2016

2017 2018 2019 2020

-30,000.00

-20,000.00

-10,000.00

0.00

10,000.00

20,000.00

30,000.00

40,000.00

50,000.00

Jan

Feb

Ma

r

Ap

r

Ma

y

Jun

Jul

Au

g

Sep

Oct

No

v

De

c

India - Yearly cumulative flows

2013 2014 2015 2016

2017 2018 2019 2020

-300,000.00

-200,000.00

-100,000.00

0.00

100,000.00

200,000.00

300,000.00

400,000.00

Jan

Feb

Ma

r

Ap

r

Ma

y

Jun

Jul

Au

g

Sep

Oct

No

v

De

cIndonesia - Yearly cumulative flows

2013 2014 2015 2016

2017 2018 2019 2020

-15,000.00

-10,000.00

-5,000.00

0.00

5,000.00

10,000.00

15,000.00

20,000.00

Jan

Feb

Ma

r

Ap

r

Ma

y

Jun

Jul

Au

g

Sep

Oct

No

v

De

c

Thailand - Yearly cumulative flows

2013 2014 2015 2016

2017 2018 2019 2020

-6,000.00

-4,000.00

-2,000.00

0.00

2,000.00

4,000.00

6,000.00

8,000.00

Jan

Feb

Ma

r

Ap

r

Ma

y

Jun

Jul

Au

g

Sep

Oct

No

v

De

c

Malaysia - Yearly cumulative flows

2013 2014 2015 2016

2017 2018 2019 2020

Source: Bloomberg, CEIC, OCBC

• Long term inflow momentum still lagging by historical averages in Indonesia (around -2.0 S.D. lower), Taiwan (~ -1.8

S.D), Thailand (~ -1.5 S.D) and Malaysia (~ -1.5 S.D), suggesting more room for inflows into South Asia.

1045

1095

1145

1195

1245

1295

1345-9000

-7000

-5000

-3000

-1000

1000

3000

5000

7000

9000

11000

Dec

-17

Mar

-18

Jun-

18

Sep

-18

Dec

-18

Mar

-19

Jun-

19

Sep

-19

Dec

-19

Mar

-20

Jun-

20

Sep

-20

South Korea

NFB: Bond & Eq 20D RS USD-KRW

Portfolio inflows focused on N. Asia and equities for now,

South Asia should become more attractive in 2021…

28.3

28.8

29.3

29.8

30.3

30.8

31.3

31.8-16000

-11000

-6000

-1000

4000

Dec

-17

Mar

-18

Jun-

18

Sep

-18

Dec

-18

Mar

-19

Jun-

19

Sep

-19

Dec

-19

Mar

-20

Jun-

20

Sep

-20

Taiwan

NFB: 20d RS USD-TWD

62.00

64.00

66.00

68.00

70.00

72.00

74.00

76.00

78.00-20000

-15000

-10000

-5000

0

5000

10000

Dec

-17

Mar

-18

Jun-

18

Sep

-18

Dec

-18

Mar

-19

Jun-

19

Sep

-19

Dec

-19

Mar

-20

Jun-

20

Sep

-20

India

NFB: Bond & Eq RS 20D USD-INR

13000

13500

14000

14500

15000

15500

16000

16500

17000-10000

-8000

-6000

-4000

-2000

0

2000

4000

6000

8000

Dec

-17

Mar

-18

Jun-

18

Sep

-18

Dec

-18

Mar

-19

Jun-

19

Sep

-19

Dec

-19

Mar

-20

Jun-

20

Sep

-20

Indonesia

Bond & Equity: 20D RS USD-IDR

30.0

30.5

31.0

31.5

32.0

32.5

33.0

33.5-3000

-2000

-1000

0

1000

2000

Dec

-17

Mar

-18

Jun-

18

Sep

-18

Dec

-18

Mar

-19

Jun-

19

Sep

-19

Dec

-19

Mar

-20

Jun-

20

Sep

-20

Thailand

Net bond & equity WTD RS20 USD-THB

3.85

3.95

4.05

4.15

4.25

4.35

4.45-1800

-1500

-1200

-900

-600

-300

0

300

600

900

Jan-

18

Ap

r-18

Jul-1

8

Oct

-18

Jan-

19

Ap

r-19

Jul-1

9

Oct

-19

Jan-

20

Ap

r-20

Jul-2

0

Oct

-20

Malaysia

Equity 20D RS USD-MYR

31Source: Bloomberg, CEIC, OCBC

… especially if real yields can stay elevated amid steady

growth and low DM rate environment


-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jan-1

4

Jul-1

4

Jan-1

5

Jul-1

5

Jan-1

6

Jul-1

6

Jan-1

7

Jul-1

7

Jan-1

8

Jul-1

8

Jan-1

9

Jul-1

9

Jan-2

0

Jul-2

0

Indonesia

10y real rate ID-US 10y real rate gap

%

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

6.5

Jan-1

4

Jul-1

4

Jan-1

5

Jul-1

5

Jan-1

6

Jul-1

6

Jan-1

7

Jul-1

7

Jan-1

8

Jul-1

8

Jan-1

9

Jul-1

9

Jan-2

0

Jul-2

0

Malaysia

10y real rate MY-US 10y real rate gap

%

• This would increase the attractiveness for a high-yielder like the IDR. MYR real yields have also held up very well during

this period, in part due to the collapse of inflationary pressures.

• Overall, the RMB should continue to lead Asian FX strength early in 2021. However, with the broadening of the

recovery, the IDR and MYR may see room to catch up in terms of appreciation on the back of portfolio inflows.

The central banks are also likely more tolerant to local currency appreciation

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Oct

-11

Ap

r-1

2

Oct

-12

Ap

r-1

3

Oct

-13

Ap

r-1

4

Oct

-14

Ap

r-1

5

Oct

-15

Ap

r-1

6

Oct

-16

Ap

r-1

7

Oct

-17

Ap

r-1

8

Oct

-18

Ap

r-1

9

Oct

-19

Ap

r-2

0

Oct

-20

South Asia avg 10y real rates vs UST 10y real rates

Real yield gap over USTs

SGD NEER: No impetus to move out of lockdown mode,

leaving the USD-SGD still subject to broad USD moves

-0.2500

-0.2000

-0.1500

-0.1000

-0.0500

0.0000

0.0500

0.1000

0.1500

Contribution of SGD NEER component currencies (since Oct MAS MPS)

INR

AUD

IDR

KRW

GBP

CNY

THB

TWD

JPY

MYR

EUR

USD

SGD strengthens agst currency x

SGD weakens agst currency x


116

117

118

119

120

121

122

123

124

125

126

127

128

129

Oct-

13

Jan-1

4

Apr-

14

Jul-1

4

Oct-

14

Jan-1

5

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

Apr-

16

Jul-1

6

Oct-

16

Jan-1

7

Apr-

17

Jul-1

7

Oct-

17

Jan-1

8

Apr-

18

Jul-1

8

Oct-

18

Jan-1

9

Apr-

19

Jul-1

9

Oct-

19

Jan-2

0

Apr-

20

Jul-2

0

Oct-

20

Jan-2

1

Apr-

21

2.0%pa+/-2.0% band

flatten slope

neutral slope

1.0%pa+/-2.0% band

flatten slope

0.5%pa+/-2.0%

band

0.0%pa+/-2.0% band

0.5%pa+/-2.0%

band

steepen slope

1.0%pa+/-2.0% band

steepen slope

0.5%pa+/-2.0%

band

flatten slope neutral slope,

re-centre lower

0.0%pa+/-2.0% band

• Macro outlook for Singapore is not out of the woods, leaving little impetus to drive the SGD NEER out of the recent tight

range. Prefer to fade moves in the basket towards +0.50% above parity and -0.20% below parity. The USD-SGD, thus,

should grind lower in a gradual pace (in-line with broad USD), but lagging the rest of USD-Asia in the downward move.

• Optimism for vaccines and eventual global growth normalization will eventually shift MAS’s stance, but a challenging 4Q

2020 implies that it will be premature to expect such a move in 1H 2021.

FX Forecasts (correct as of 1 Dec)

34

Spot Dec-20 Mar-21 Jun-21 Sep-21 Dec-21

USD-JPY 104.27 103.89 103.73 103.48 103.02 102.56

EUR-USD 1.1976 1.2022 1.2089 1.2191 1.2244 1.2298

GBP-USD 1.3356 1.3273 1.3333 1.3557 1.3648 1.3738

AUD-USD 0.7352 0.7403 0.7542 0.7590 0.7595 0.7600

NZD-USD 0.7033 0.7078 0.7117 0.7138 0.7140 0.7142

USD-CAD 1.2971 1.2910 1.2859 1.2832 1.2830 1.2827

USD-CHF 0.9064 0.9029 0.9028 0.9049 0.9003 0.8957

USD-SGD 1.3408 1.3368 1.3291 1.3197 1.3196 1.3194

USD-CNY 6.5717 6.5381 6.4879 6.4441 6.4548 6.4655

USD-THB 30.26 30.14 30.12 30.14 29.76 29.3879

USD-IDR 14,130 13,939 13,789 13,841 13,716 13,592

USD-MYR 4.0792 4.0519 4.0237 4.0088 4.0077 4.0065

USD-KRW 1106.15 1100.70 1092.96 1084.98 1089.90 1094.82

USD-TWD 28.676 28.581 28.441 28.333 28.254 28.176

USD-HKD 7.7526 7.7550 7.7533 7.7500 7.7500 7.7500

USD-PHP 48.05 47.96 47.84 47.93 47.56 47.19

USD-INR 73.62 73.23 72.72 72.30 72.06 71.82

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35

2021 fx outlook · 2014. 12. 20. · 3mma source: bloomberg, ocbc 5 • …but the market cannot...

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