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Mizuho Dealer’s Eye May 2014

U.S. Dollar .................................................................... 1 Euro .............................................................................. 6 Canadian Dollar ......................................................... 11 British Pound .............................................................. 13 Singapore Dollar ........................................................ 17 Thai Baht .................................................................... 20 Malaysian Ringgit ...................................................... 24 Indonesian Rupiah ..................................................... 27

Philippine Peso ........................................................... 29 Korean Won ............................................................... 35 New Taiwan Dollar .................................................... 38 Hong Kong Dollar ...................................................... 43 Chinese Yuan ............................................................. 46 Australian Dollar ........................................................ 54 India Rupee ................................................................ 59

Mizuho Bank, Ltd.

Forex Division

Mizuho Bank | Mizuho Dealer’s Eye

April 30, 2014 1

Daisuke Karakama, Masakatsu Fukaya, Yuki Yamazaki, Market Economists, Forex Division

U.S. Dollar – May 2014

1. Review of the Previous Month

The dollar/yen pair fluttered up and down in April, though it moved with a heavy topside.

After starting the month at the upper-102 yen mark on April 1, the pair then strengthened to the

upper-103 yen level on the back of the bullish results of the several U.S. economic indicators, such as

the Manufacturing ISM Report on Business for March and the ADP employment statistics for March.

The ECB Governing Council decided to maintain the status quo at its much-anticipated meeting on

April 3. In his subsequent press conference, though, ECB President Mario Draghi touched on the

possibility of quantitative easing. As a result, the euro/dollar pair crashed and the dollar/yen pair was

also pulled up to the 104 yen mark, its highest point since January. The U.S. employment data for

March was released on April 4. Nonfarm payrolls were up 192,000 on the previous month, slightly

below market expectations for a 200,000 month-on-month rise. The dollar/yen pair jumped temporarily

to 104.13 yen directly after the announcement, but it was dragged back to the lower-103 yen mark by

plummeting U.S. interest rates. The Bank of Japan’s Monetary Policy Committee (MPC) met on April

8. In his subsequent press conference, BOJ Governor Haruhiko Kuroda ruled out the possibility of the

early introduction of further easing. The yen was bought back as a result, with the currency pair falling

further to the mid-101 yen level. The risk-off mood intensified on April 9 as U.S. stocks came under

some adjustment. The pair fell even faster on April 11 to temporarily hit 101.32 yen, a monthly low.

It rallied to the upper-101 yen level on April 14 on the back of the buoyant results of the U.S. retail

sales data for March. There had been high hopes regarding an upcoming talk between Japanese Prime

Minister Shinzo Abe and BOJ Governor Kuroda, but as these excessive expectations eased off, yen

buy-backs intensified. The pair was also weighed downed by news that the Ukrainian government had

launched an attack on pro-Russian insurgents. All of this saw the pair dropping to the mid-101 yen

mark on April 15. However, it then recovered to the lower-102 yen mark on April 16 following the

warm reaction to the release of strong Chinese GDP data for January–March. The pair weakened once

again to the upper-101 yen level during Asian trading time on April 17 in the wake of the dovish

contents of a speech by FRB Chair Janet Yellen on April 16. However, it bounced back to the mid-102

yen mark during U.S. trading time following the bullish results of the new applications for

unemployment insurance data and a regional FRB Manufacturing Index.

With market participants thin on the ground thereafter due to the Easter holidays, the pair moved

with a lack of incentives at the upper-102 yen level on April 21. It then dropped to the lower-102 yen

mark on April 23 after the markets reacted badly the poor results of China’s April Manufacturing PMI

and the U.S. Housing Starts data for March. The pair continued falling to around 102 yen on April 24


April 30, 2014 2

as risk aversion intensified upon news that Russia has begun military maneuvers close to the border

with Ukraine. Market participants grew thinner towards the end of the month as Japan entered the

Golden Week holidays. During this time, the pair moved strongly at the upper-102 yen mark on the

back of the firm movements of U.S. and European stocks.

100

101

102

103

104

105

106

14/01 14/02 14/03 14/04

（USD) USD/JPY

2. Outlook for This Month: In the first half of the month, the dollar/yen pair will be swayed by U.S. economic indicators and the subsequent market reaction; in the latter half of the month the pair will be swayed by Japanese political and economic trends

Expected Ranges Against the yen: JPY100.00–104.00

The dollar/yen pair will gradually grow firmer in May, though it will be swayed by headlines

emanating from Japan in the latter half of the month.

The pair grew more deadlocked from mid-April onwards. Turning to the Japanese side first, and the

CPI rose faster than originally expected, while expectations for further easing dropped off significantly

in the wake of BOJ Governor Haruhiko Kuroda’s hawkish stance (the current market consensus is that

the next round of easing will be implemented from July–September onwards).

The U.S. continued to post a number of lukewarm economic indicators in April. Furthermore, after

putting her foot in her mouth at the March FOMC meeting, FRB Chair Janet Yellen adopted a more

dovish stance last month. Long-term U.S. interest rates are moving stably at lows around 2.7%, so the

dollar is moving with a heavy topside. With the situation in Ukraine remaining on a knife edge, market

risk sentiments are also being weighed down by geopolitical risk.


April 30, 2014 3

So how long is this state of affairs likely to continue? The situation in Ukraine grows more

complicated by the day and we are unlikely to see an overarching solution any time soon. Japan saw

CPI rising in Tokyo’s 23 wards in April, with the month also marked by a Bank of Japan MPC meeting

and a visit by President Obama. These events are now out of the way, though, and the near future is

likely to be marked by a dearth of new factors. As a result, for the time being it will remain difficult for

investors to incline their positions in one direction or other. Nonetheless, with the U.S. economy

continuing to recover, U.S. interest rates are undergoing a gentle rise, so the dollar/yen pair is likely to

grow firmer whilst moving flatly on the whole. Most U.S. indicators released since April have pointed

to a slow but steady recovery. Observers had been expecting big things from these economic indicators,

in part due to expectations for a bounce-back following the historic cold snap that hit the country at the

start of the year. With the U.S. continuing to release data that falls below prior expectations, though,

these excessive hopes are now starting to drop off. However, things look set to change from here on.

The headwinds facing U.S. economic indicators will ease off and the number of positive surprises will

also increase gradually, with the markets reacting warmly to these trends. On this point, the likelihood

that the aforementioned scenario will occur in May will depend in large part on the results of the U.S.

Manufacturing ISM Report on Business for April (released Thursday, May 1) and the April

employment data (released Friday, May 2). At this moment in time, it seems likely these results will

continue to point to an ongoing U.S. economic recovery.

The CPI for Tokyo’s 23 wards is a key indicator for gauging the direction of BOJ monetary policy.

In April, core CPI (excluding fresh foods) was up 2.7% on the previous month. This was more-or-less

in accord with market expectations for a 2.8% m-o-m rise. Though there was no acceleration in the

pace of follow-up price hikes, the results did not deviate from the BOJ’s inflation outlook, so they had

a negligible impact on market forecasts for further easing. The next focal point for the Japanese

economy will be how much it slows down in the wake of the consumption tax hike. In order to

ascertain this, observers will have to wait for data released from mid-May onwards, such as the

Economy Watchers Survey or the retail sales statistics. Until then, the situation will continue to be

marked by a dearth of factors.

Nonetheless, the data released in the latter half of the month could well lead to yen appreciation, so

caution will be necessary. As mentioned above, economic indicators released from mid-May onwards

will reflect the impact of the consumption tax hike. The CPI data for Tokyo’s 23 wards will also be

released around the same time. However, the data from May onwards is likely to see a decline in the

trend of rising prices due to yen depreciation, so the strength of Japan’s economy will be tested. The

details of GPIF investment policies and the Abe administration’s growth strategy (due for release on

June) will also become clearer around this time, so the market consensus will start to grow firmer, too.

Though only a tail risk, if all these factors turn out negative, the dollar/yen pair and the Nikkei Stock

Average are expected to undergo significant slides. In the latter half of May, market participants should

pay close attention to these headline risks emanating from Japan.


April 30, 2014 4

Dealers' Market Forecast

(Note: These opinions do not necessarily agree with the other contents of this report.)

Bullish on the dollar (8 bulls: 100.00–106.00, Core: 101.00–104.25)

Tate

101.60

–

103.80

The dollar will be pushed higher and the yen lower by Japan’s trade deficit and the difference between U.S. and

Japanese monetary policy. There is growing uncertainty about whether Japan will implement further easing this

summer. However, the dollar/yen pair will be supported by news related to the release of Japan’s updated growth

strategy in June, such as announcements about corporate tax cuts or changes to the way the GPIF allocates assets.

Fujisaki

100.00

–

105.00

The main scenario is one of gentle yen depreciation, though the dollar/yen pair’s topside may prove surprisingly

heavy. The dollar will be supported by core supply and demand and interest-rate differentials, but Japanese

imports look set to fall, while expectations for further BOJ easing are also dropping off. Once geopolitical risk is

added to the equation, it seems the pair will move in a narrow range in May.

Kato

101.00

–

106.00

Though the situation in Ukraine remains a risk factor, this is unlikely to lead to risk-aversive yen buying any time

soon. The dollar/yen pair’s upwards momentum will also be supported by technical factors, with so-called “May

selling” unlikely to trouble the pair too much.

Noda

100.00

–

105.00

The one-month implied volatility for the dollar/yen pair has dropped to the lower-6% mark. If past trends are

anything to go by, it is just a matter of time before the pair makes a move. Considering how the Japanese unit has

not gained that much despite the situation in Ukraine and other bullish-yen factors, if the pair does shift, it will

probably be in a bearish-yen direction.

Yano

101.00

–

104.00

Despite growing expectations for further BOJ easing, the dollar/yen pair is likely to continue moving firmly due to

dollar buying on the back of real-demand yen selling and speculation about widening Japanese/U.S. interest-rate

differentials. The pair will also be supported by a decline in the activity of hedge funds and other speculators.

Takada

101.00

–

104.50

The dollar/yen pair’s topside will probably be tested in May on the back of the U.S. economic recovery and steady

QE tapering. However, if the U.S posts some bearish economic indicators or the situation in Ukraine worsens, the

yen will see some risk-evasive buy-backs. Nonetheless, the pair’s room on the downside will be capped.

Toriba

100.50

–

104.00

The dollar/yen pair will trade in a range with an eye on U.S. fundamentals. The first thing to attract attention will

be the jobs-related indicators released on May 2, such as the U.S. employment data and unemployment rate.

However, we are unlikely to see the emergence of any factors capable of forming a trend, so the pair will continue

to trade with a lack of incentives.

Shimoyama

101.00

–

104.00

Expectations for further BOJ easing in the near future are on the wane, though the markets seem to have factored

this in. The key to the dollar/yen pair’s movements lies on the U.S. side. U.S. long-term interest rates are strongly

correlated with the pair’s movements. If these rates rise in lockstep with recovering U.S. fundamentals, the

currency pair is also likely to edge higher.


April 30, 2014 5

Bearish on the dollar (5 bears: 98.50–104.00, Core: 99.00–103.00)

Yamashita

98.50

–

102.50

The bearish-yen market has been helped along by bullish Nikkei stock prices. The dollar/yen pair’s movements

are likely to be impacted by the Golden Week holidays, though, while the yen is unlikely to be sold as tension

rises in Ukraine. The dollar/yen pair is expected to trade with a heavy topside.

Sato

99.00

–

104.00

The markets have now factored in an ongoing U.S. economic recovery and a continuation of QE tapering, so these

factors are unlikely to push the dollar/yen pair upwards. As the pair’s movements grow more dependent on

Japan’s growth strategy and further easing by the BOJ, market participants should be wary of adjustment risk in

May.

Omi

98.80

–

101.80

The dollar is likely to be sold on the back of a decline in expectations for further BOJ easing. If the dollar/yen pair

drops below 100.76 yen, its low for the fiscal year, this will trigger dollar selling by exporters. The pair may even

slip close to double digits again, so caution will be necessary.

Nishijima

100.50

–

104.00

The situation in Ukraine remains tense, while concerns of a Chinese economic slowdown continue to smolder

away. Under these circumstances, risk appetite will remain repressed and there are unlikely to be any active

attempts on the dollar/yen pair’s topside. With expectations for further BOJ easing also on the wane, the pair’s

room on the downside may well be tested. Beware of “May selling.”

Inoue

100.00

–

103.00

Expectations for the early introduction of further BOJ easing are dropping off. With the Abe administration set to

announce a corporate tax cut in its growth strategy (released in June), the dollar/yen pair will lack upwards

momentum for the time being. As overseas investors focus less on Japan, stocks may move bearishly on the back

of the “sell in May” trend, so the dollar/yen pair’s room on the topside will probably be capped.

(As of April 30)


April 30, 2014 6

Daisuke Karakama, Kenta Tadaide, Yuki Yamazaki, Market Economists, Forex Division

Euro – May 2014


The euro/dollar pair moved with a heavy topside in April.

After opening the month at the upper-$1.37 mark on April 1, the pair then moved firmly at the

lower-$1.38 level in the wake of the bullish March Manufacturing PMI results of Spain, Italy, France

and other eurozone nations. The euro/yen pair had seen buying on the back of expectations for further

easing by the Bank of Japan, but the pair was pushed back by selling for profit taking on April 2. The

euro/dollar pair was also dragged down to the mid-$1.37 level. The ECB Governing Council decided

to maintain the status quo at its much-anticipated meeting on April 3. Directly after the announcement,

the euro was bought for a time to $1.38 and the lower-143 yen mark against its U.S. and Japanese

counterparts, respectively. The euro/dollar pair then dropped below $1.37, though, after ECB President

Mario Draghi commented in his press conference that the ECB were positively considering the option

of quantitative easing (QE). On April 4, a German newspaper reported that the ECB had modelled

what impact a 1-trillion-euro QE program would have on prices. This news was met with more euro

selling. The euro/dollar pair temporarily hit a monthly low of $1.3672, while the euro/yen pair fell to

the upper-142 yen level. On April 7, though, ECB Executive Board member Yves Mersch and

Bundesbank President Jens Weidmann both expressed the opinion that deflationary risks were being

controlled. With the greenback also being sold on the back of falling U.S. interest rates, the euro/dollar

pair gained to the lower-$1.37 mark. The minutes to the FOMC meeting were released on April 9. The

contents were more dovish than expected, with U.S. interest rates sliding further as a result. The dollar

was sold and the currency pair strengthened to the upper-$1.38 level. April 10 saw the release of the

worse-than-expected results of France’s March CPI data and Italy’s February industrial production

figures. Dollar selling prevailed, though, with the currency pair inching right up to $1.3900. Dollar

selling continued towards April 11, with the pair temporarily hitting a monthly high of $1.3906.

At the weekend, ECB President Mario Draghi hinted that euro appreciation could be met with

further easing. As a result, the pair opened the week beginning April 14 at the lower-$1.38 level. The

greenback was then bought following the warm reaction to the healthy results of the U.S. retail sales

figures for March. The pair dropped down to the lower-$1.38 level, with the single currency also

weakening to the lower-140 yen mark against its Japanese counterpart. On April 15, the euro/dollar

pair continuing falling to hit the upper-$1.37 level on the back of the worse-than-expected results of the

April German ZEW Indicator of Economic Sentiment. The UK pound strengthened on April 16 on the

back of improvements in the UK March unemployment rate and so on. The euro/dollar pair was also

pulled up to the mid-$1.38 mark, though it was soon pushed back to the lower-$1.38 level by dollar


April 30, 2014 7

buying after the markets reacted warmly to the better-than-expected results of the U.S. industrial

production data for March. On April 17, the currency pair rose to the upper-$1.38 level due to adjustive

movements in advance of the Easter holidays. It fell back to the lower-$1.38 mark, though, after dollar

buying intensified on the back of the bullish results of the U.S. new applications for unemployment

insurance data and the Philadelphia FRB Manufacturing Index for April.

With the Easter holiday looming, the pair moved with a lack of incentives at the upper-$1.37 level

on April 21. The pair strengthened to the mid-$1.38 level on April 23 when a series of eurozone

Manufacturing and Services PMIs for April all outperformed market expectations. During a speech on

April 24, ECB President Mario Draghi indicated that the ECB was prepared to introduce further easing.

As a result, euro selling intensified for a time. However, as risk aversion increased on the back of

growing concerns about the situation in Ukraine, the pair moved firmly at the lower-$1.38 mark. With

the eurozone’s April Harmonised Index of Consumer Prices (HICP) set to be released on the evening

of April 30, the markets remained in wait-and-see mode towards the month’s end, with the euro/dollar

pair moving with a dearth of incentives at the lower-$1.38 mark.

136

138

140

142

144

146

1.34

1.35

1.36

1.37

1.38

1.39

1.4

14/01 14/02 14/03 14/04

（JPY)（USD) EUR/USD EUR/JPY

2. Outlook for This Month:

Expectations for further ECB easing; and verbal interventions

Expected Ranges Against the US$: US$1.3650–1.4050

Against the yen: JPY138.00–143.00

The euro is expected to move firmly in May.

In April, the euro/dollar pair traded in a range around $1.38, as was broadly expected. Though the

ECB Governing Council decided to leave things unchanged at its much-anticipated meeting, it did

discuss the possibility of quantitative easing (QE), thus giving the impression that although it was

maintaining the status quo for now, it was close to implementing easing. During this time, the pair

dropped down to the upper-$1.36 level. However, when the minutes to the FOMC meeting (of March


April 30, 2014 8

18–19) turned out to be more dovish than expected, the dollar was sold and the currency pair was

pushed upwards. Under these circumstances, ECB officials have begun making statements explicitly

aimed at curbing the euro’s rise.

When it comes to gauging the pair’s movements, the first thing to focus on is the possibility of

further ECB easing. Triggers for such a move could include an unexpected shift towards disinflation or

growing concerns about deflation due to euro strength. With regards to disinflation, the eurozone’s

March Harmonised Index of Consumer Prices (HICP) was only up 0.5% on the same month last year.

This was its lowest level in around four years. As ECB President Mario Draghi has explained, though,

this was partly due to: seasonal factors related to the Easter holidays (which fell in March last year and

April this year); and the impact of falling energy prices compared to last year. The April HICP

(released April 30) is expected to show inflation bouncing back. The preliminary Eurozone Composite

PMI for April also beat market expectations by improving to 54.0 (up on March’s 53.1). This suggests

the eurozone is undergoing a steady economic recovery and this will probably give the ECB more time

to see how things develop.

The fundamentals also suggest the ECB Governing Council will maintain the status quo when it

meets on Thursday, May 8. If the ECB does decide to put further easing on the back burner, this is

likely to see the euro coming under more buying pressure. What could throw a spanner in the works,

though, is euro appreciation, which could provide a trigger for further ECB easing. As mentioned

above, since March onwards, ECB officials have been making statements aimed at curbing the euro’s

rise. Their tone has been getting higher each time they make a round of comments. Officials have now

started to say that euro appreciation could act as a trigger for further easing, so the euro’s rise is also

likely to be curbed by similar statements in May, too. At the moment, around $1.40 seems to be the

limit of how much euro appreciation the ECB is prepared to tolerate. As the currency pair approaches

this level, its topside will be held down by the aforementioned verbal interventions. However, the ECB

will probably need to implement some further easing eventually.

The U.S. FOMC will be meeting over April 29–30. All the economic indicators and employment

statistics released since the March meeting suggest the U.S. economy has bounced back from the

impact of the cold snap and is now on the road to recovery. Though weak housing indicators are a

matter of some concern, this weakness is due to a sense that there is a lack of affordable properties out

there: it is no indication of a slump in consumer appetite for real estate. The pace of the housing market

recovery is likely to remain sluggish, but not sluggish enough to force the FRB to revise its policies

right now. As in previous months, the FOMC will probably opt to taper QE by a further $10 billion this

time (U.S. treasuries - $5 billion; MBS - $5 billion). There will be no economic forecast or press

conference this time, either, so the impact on the markets is likely to be muted. There is no FOMC

meeting scheduled for May, so after the release of the April U.S. employment data on Friday, May 2,

the euro/dollar pair will mainly be swayed by factors emanating from the eurozone.


April 30, 2014 9

Dealers' Market Forecast

(Note: These opinions do not necessarily agree with the other contents of this report.)

Bullish on the euro (6 bulls: 1.3600–1.4200, Core: 1.3675–1.4125)

Fujisaki

1.3600

–

1.4200

The euro is expected to move firmly on the whole due to: the eurozone’s current account surplus; deflationary

concerns; and upwards pressure on mid- to long-term euro funds. The euro/dollar pair is sensitive to the

movements of interest rate differentials, so if expectations seem to be growing for an early rise in dollar interest

rates, this trend could be reversed.

Yamashita

1.3700

–

1.4100

Expectations are rising for an interest rate cut at next month’s ECB Governing Council. The euro is moving at

highs nonetheless, while Germany and other EU nations continue to post robust economic indicators. Under these

circumstances, market sentiments and the fundamentals are both likely to cap the euro’s downside.

Sato

1.3600

–

1.4200

Though the markets are growing more cautious about the possibility of further ECB easing, the May ECB

Governing Council meeting is unlikely to make such a move. The euro faces strong buying pressure due to the

trade surplus and other structural factors, so the euro/dollar pair is expected to edge up further this month.

Takada

1.3650

–

1.4000

The euro might be sold for a time on the back of expectations for further ECB easing or worsening tensions in

Ukraine. With funds set to continue flowing into the eurozone, though, the single currency will probably move

firmly in May.

Omi

1.3850

–

1.4150

If fund repatriations are given a boost by the impending stress tests, the euro/dollar pair could hit the $1.40 mark.

The euro will remain bullish in May.

Inoue

1.3700

–

1.4000

The ECB Governing Council is likely to postpone further easing when it meets in May. ECB officials have been

speaking out as they try to curb the euro’s rise, but their comments are having less of an impact and the euro looks

set to continue moving firmly in May.

Bearish on the euro (7 bears: 1.3500–1.4000, Core: 1.3500–1.3960)

Tate

1.3630

–

1.3960

The euro faces strong buying pressure due to the trade surplus and other structural factors, but the euro/dollar pair

will be marked by dollar bullishness in the short term due to: comments by ECB officials seeking to rein in the

euro’s rise; deep-rooted expectations for further ECB easing; and confirmation that the U.S. economy is

recovering after slumping in winter due to the impact of the cold weather.

Kato

1.3500

–

1.4000

The markets will continue to be swayed by deep-rooted expectations for further ECB easing and a normalization

of U.S. interest rates. Under these circumstances, market participants will refrain from chasing the euro’s topside

while the situation in Ukraine remains tense. As a result, the single currency is likely to move with a heavy topside

in May.

Noda

1.3500

–

1.4000

The euro/dollar pair will continue to be swayed by events in Ukraine. If the standoff between the U.S. and Russia

grows more pronounced, this will probably lead to dollar selling. Provided things do not get substantially worse,

though, the euro is likely to move bearishly on the back of the discrepant performances of the U.S. and European

economies.

Yano

1.3700

–

1.3900

The euro continues to move firmly, but the ECB has touched on the possibility of curbing the euro’s rise or

implementing further easing as it seeks to avoid deflation. If concerns grow about the euro’s high price, there will

be more attempts to curb the unit’s rise, so the euro/dollar pair looks set to trade heavily in May.

Nishijima

1.3500

–

1.3900

Most observers believe inflation will swing upwards in April due to factors related to the Easter holidays. If

inflation remains sluggish, concerns will grow about disinflation. Under these circumstances, the euro will be sold

on the back of speculation over further ECB easing. A number of ECB officials will probably intervene verbally

to curb the euro’s rise as the euro/dollar pair rises to around $1.39, so the pair will continue to move with a heavy

topside.


April 30, 2014 10

Toriba

1.3500

–

1.4000

There remains a substantial gap between ECB and FRB monetary policy. There are also strong concerns about

sliding inflation within the eurozone, with ECB President Mario Draghi hinting at further easing and as he tries to

curb the euro’s rise with his words. Under these circumstances, the euro/dollar pair’s room on the topside will be

capped.

Shimoyama

1.3600

–

1.3900

ECB President Mario Draghi and other ECB officials have intervened verbally to curb the euro’s rise, so it seems

they want to prevent the euro/dollar pair rising above $1.4000. The euro will be supported by the current account

surplus and other factors, but speculators and so on will refrain from actively buying the single currency.

(As of April 30)


April 30, 2014 11

Katsuhiko Takahashi, Americas Treasury Division

Canadian Dollar – May 2014


Canada published some bullish employment data for March at the beginning of the month. Jobs were

up 42,900 on the previous month, double market forecasts for a 22,500 m-o-m rise, while the

unemployment rate also dropped from 7.0% to 6.9%. As a result, the U.S. dollar/Canadian dollar pair

plunged temporarily from around C$1.1020 to C$1.0957. The Canadian unit continued to be bought

back against the greenback thereafter, with the pair falling to C$1.0858 for a time even though

Canada’s March Housing Starts data and February Home-Building Approvals figures both dropped

below market expectations. The markets were then hit by speculation about demand for dollar

buying/Canadian-dollar selling in relation to an M&A. With the pair’s downside also supported at its

technical support line, its slide was halted and it edged higher due to buy-backs.

Mid-April saw the Bank of Canada keeping the policy rate fixed at 1%, as expected. As with the

previous month, the accompanying statement struck a dovish tone and said that downside risk to

inflation remained substantial. Though all this fell within market expectations, the loonie was sold

directly after the announcement, with the currency pair rising to C$1.1034.

The Canadian unit was bought for a time in the latter half of the month after the Canadian

Wholesale Data for February posted better-than-expected growth. With tensions rising in Ukraine,

though, risk aversion gradually increased and the pair gained to the mid-C$1.10 level. The Canadian

retail sales figures for February were released on April 23. As expected, the data was up 0.5% on the

previous month. However, this marked a slide on the previous month’s data, which had itself been

revised downwards. The Canadian unit was sold as a result. With the pair also boosted by hearty

dollar-buying demand, it temporarily hit C$1.1053. Thereafter, the markets remained in wait-and-see

mode on the whole. With market participants keeping an eye out for the next event, risk aversion eased

off a little and the pair broke below C$1.10 to approach the month’s end at the mid-C$1.09 level.


April 30, 2014 12

90

92

94

96

98

100

1.06

1.08

1.1

1.12

1.14

14/01 14/02 14/03 14/04

（JPY)（CAD) USD/CAD CAD/JPY


Inflation may swing lower; the economy will recover from the slump induced by the cold weather

Expected Ranges Against the US$: C$1.0800–1.1200


The Bank of Canada’s statement emphasized inflationary risks on the downside, as did Bank of Canada

Governor Stephen Poloz in a speech. If inflation weakens further, the Canadian dollar will be pushed

down by expectations for Canadian interest rate cuts. On the other hand, more and more U.S. indicators

are pointing to a U.S. economic recovery, so the FRB will continue to head towards an exit. As a result,

there are deep-rooted expectations for dollar bullishness, so the U.S. dollar/Canadian dollar pair is

likely to face strong upwards pressure for the time being. Though the situation in Ukraine, a matter of

concern, is unlikely to have a global impact, it could prove a destabilizing factor, so attention should be

paid to market movements.


April 30, 2014 13

Taku Kanzaki, Europe Treasury Division

British Pound – May 2014


The pound moved firmly in April on the back of several bullish UK economic indicators, with the unit

hitting its highest point against the dollar since November 2009.

The UK March Manufacturing PMI (April 1) and Services PMI (April 3) were released at the start

of the month, with both dropping below market expectations. Sterling was also dragged lower by a

bearish euro/dollar pair after ECB President Mario Draghi made some dovish remarks in his press

conference following the ECB Governing Council meeting on April 3. As a result, the pound was sold

from the upper-$1.66 mark to the mid-$1.65 level against its U.S. counterpart. However, though both

PMIs had dropped below expectations, they nonetheless remained above 50 (the key point for judging

whether the economy is expanding or contracting), so the scale of the pound’s slide was capped. The

UK posted some healthy February Industrial and Manufacturing Production figures on April 8. This

saw the pound/dollar pair rising to the mid-$1.67 mark for the first time since mid-February. The

minutes to the March FOMC meeting were then released on April 9. The dovish contents of the

minutes pushed the dollar lower, with the currency pair rising to the upper-$1.67 level to test new highs

for the year.

With the yen moving bullishly across the board, meanwhile, the pound weakened against the

Japanese unit towards mid-April. The U.S. March employment data was released on April 4. Nonfarm

payrolls were up 192,000 month-on-month, as opposed to market expectations for a 200,000 m-o-m

rise, while the unemployment rate stood at 6.7%, higher than market forecasts of 6.6%. The previous

month’s figures had been revised upwards, so these results were not actually that bad. Nonetheless,

after approaching a 10-week high of 104 yen before the release of the data, the dollar/yen pair was now

at a level conducive to some adjustive selling, so the results saw the pair dropping to the lower-103 yen

level. Under these circumstances, the pound/yen pair also fell from the mid-172 yen mark to the

lower-171 yen level. In his press conference after the April 8 Bank of Japan Monetary Policy

Committee (MPC) meeting, meanwhile, BOJ Governor Haruhiko Kuroda struck a hawkish tone. As

the Japanese unit was bought back sharply, the pound/yen pair dropped to the lower-170 yen mark.

Sterling moved firmly against the dollar and yen from mid-April onwards. The euro/dollar pair

weakened after ECB President Mario Draghi made a verbal intervention to curb the euro’s rise on

April 12. The pound faced other selling factors too, with the UK March CPI data (released April 15)

hitting its lowest level since October 2009, for example. Sterling’s reaction was muted though, with the

pound moving at the lower-$1.67 mark and the lower-170 yen level against its U.S. and Japanese

counterparts, respectively. The ILO UK unemployment rate for December–February was released on


April 30, 2014 14

April 16. At 6.9%, the rate beat market expectations (7.1%) and was also below the 7.0% threshold

mentioned in the Bank of England’s forward guidance. This strong result saw the pound/dollar pair

hitting the lower-$1.68 mark for the first time since November 2009, with the pound/yen pair also

gaining to the lower-171 yen mark. With Europe entering the Easter holidays between April 18–21, the

pound fluctuated gently thereafter. In the minutes to the BoE’s April MPC meeting, released on April

23, the BoE struck an optimistic tone regarding the UK economy. This saw the pound gaining to the

upper-$1.67 mark and the mid-171 yen level, with sterling continuing to trade at highs towards the end

of the month.

164

166

168

170

172

174

176

1.62

1.64

1.66

1.68

1.7

14/01 14/02 14/03 14/04

（JPY)（USD) USD/GBP GBP/JPY

2. Outlook for This Month: Expectations for a UK economic recovery; the inflation outlook; and house price trends

Expected Ranges Against the US$: US$1.6700–1.7000


The pound looks set to trade firmly in May in the wake of the UK economic recovery.

All the UK economic indicators released last month proved bullish. As the UK continues to post

generally-healthy indicators in May, sterling will continue to move firmly on the back of expectations

for a UK economic recovery and interest rate hikes by the Bank of England.

The BoE’s Quarterly Inflation Report is set for release on Wednesday May 14. This is the most

important indicator for gauging when the BoE is likely to hike interest rates. In the last report in

February, the BoE predicted that the unemployment rate for the first quarter 2014 would come in at

6.9%. As last month’s ILO report showed, though, the UK’s unemployment rate already hit 6.9% in

the period December–February. The standalone monthly unemployment rate stood at 7.2% in


April 30, 2014 15

December, 6.9% in January and 6.6% in February. Based on these results, it seems quite likely that the

average unemployment rate in the first quarter will beat the BoE’s February prediction of 6.9% (the

rate will be lower). In the February report, the BoE also announced that its forward guidance would

shift to take into account several other indicators in addition to the unemployment rate. However, as

suggested by the pound’s movements last month, the markets remain highly focused on the

unemployment rate, so observers should pay close attention to how the BoE’s employment outlook

changes to reflect the recent improvements.

Attention will also be focused on the GDP growth rate outlook. It was announced last month that

average weekly wage growth (including bonuses, 3-month average) had hit 1.7% year-on-year. With

March UK CPI inflation standing at +1.6% year-on-year, this represented the first real wage increase

since April 2010. When bonuses are removed from the equation, though, real wages continue to slide.

Nonetheless, the gap between the inflation rate and the wage growth rate is narrowing, with wages

trending upwards. If increases to real wages become the norm from here on, this will boost consumer

spending and thus provide the framework for stable economic growth. On this point, observers will be

paying close attention to the Inflation Report’s GDP growth rate forecast. Attention will also remain

focused on housing indicators. The March Halifax UK House Price Index (released last month) fell

1.1% on February, but it rose 8.7% on the previous year to remain at its highest level since October

2007. The March Nationwide UK House Price Index was also up 0.4% on the previous month. Though

this was not as big as the gains seen in previous months, it nonetheless represented the 15th successive

month of m-o-m rises. Until now, it seems the buoyancy of the UK’s housing market was due in large

part to rising house prices in the London region, where the housing supply is restricted. However, the

April Rightmove UK House Price Index (released last month) revealed that offering prices for houses

had risen year-on-year across the whole of the UK. If this trend of rising house prices spreads further

across the UK and the housing market embarks on a self-sustaining recovery, the wealth effect of rising

house prices is also likely to boost consumer spending.

However, the pound’s topside is likely to be capped by verbal interventions by BoE officials and so

on as they seek to curb sterling’s rise. At present, the pound is moving at a 54-month high against the

dollar. In the wake of the Lehman Shock in August 2009, the pound/dollar pair hit a high around $1.70.

If it breaks above this level, there will be no other clear chart points to aim for until the pair approaches

$2.00, a level last reached before the Lehman Shock. A bearish pound played a key role in supporting

the UK economy following the financial crisis. The BoE has already mentioned on several occasions

that the pound’s rise could place downwards pressure on inflation. If sterling gains further from here on,

the BoE is likely to try capping its rise one way or another. The pound/euro pair, meanwhile, is gaining

at a slower pace than the pound/dollar pair, with the pound also moving below its recent mid-February

high against the single currency. This trend is likely to slow sterling’s rise against the greenback, too.

Domestic economic indicators set for release this month include: the April Manufacturing PMI

(Thursday, May 1); the April Construction PMI (Friday, May 2); the April Halifax House Price Index

(Monday, May 5); the April Services PMI (Tuesday, May 6); the March Industrial and Manufacturing


April 30, 2014 16

Production figures (Friday, May 9); the ILO unemployment rate and weekly average wage growth rate

for January–March (Wednesday, May 14); the April CPI data (Tuesday, May 20); the April retail sales

figures (Thursday, May 22); the revised GDP data for January–March (Thursday, May 22); and the

April Nationwide House Price Index (Monday, May 26). Market participants will continue to focus on

the relation between the wage growth rate and the inflation rate. Other events scheduled for May

include the BoE MPC meeting (Thursday, May 8) and the release of the minutes to this meeting

(Wednesday, May 21).


April 30, 2014 17

Noriko Suzuki, Singapore Treasury Department

Singapore Dollar – May 2014


Asian currencies were bought back during April, with the Singapore dollar also gaining further to hit a

roughly five-month high against its U.S. counterpart. After such a steep rise, though, it dropped back

slightly in the latter half of the month.

At the end of March, the FOMC touched upon the possibility of an early interest rate hike. As a

result, the Singapore unit was sold to just below S$1.28 against its U.S. counterpart. This reaction was

temporary in nature, though, with the unit then bought back on successive days. As a result, it opened

April trading at the upper-S$1.25 mark. These end-of-March buy-backs were essentially one-sided,

though, so the Singapore dollar was ripe for some adjustment in the first week in advance of major

events like the ECB Governing Council meeting and the release of the U.S. employment data for

March. This is indeed what happened, with the unit sold to around mid-S$1.26 at the beginning of the

month.

The March U.S. employment data was released on April 4. Thought the results were not that bad,

the markets had been expecting improvements, so after some violent fluctuations immediately after the

announcement, the greenback was then sold across the board, while yields on U.S. treasuries also fell

sharply. The dollar was sold against major currencies like the yen and euro as well as against Asian

currencies like the RMB and the Korean won. The Singapore unit was also bought against the U.S. unit

on consecutive days to hit the mid-S$1.24 mark on April 9, its highest level since November 2013.

However, because Asian currencies had risen at such a sharp pace, several Asian central banks

intervened to sell their own currencies on April 9. As a result, market participants stopped buying

Asian currencies from April 10, with the Singapore unit gradually seeing more selling, too.

At the start of the next week, on April 14, the Monetary Authority of Singapore (MAS) made its

currency policy announcement. As expected, it decided to continue guiding the Singapore unit higher.

The preliminary GDP figures for January–March were also released at the same time. GDP was up

5.1% year-on-year and 0.1% on the previous quarter. This represented a slowdown on the +5.5% y-o-y

and the +6.1% q-o-q results recorded in October–December. The Singapore dollar was subsequently

sold down to around mid-S$1.25 on April 15. With the Easter holidays looming thereafter, the unit

continued trading with a dearth of incentives around S$1.25.

In the week beginning April 21, the markets emerged sluggishly from the Easter break, with the

Singapore unit continuing to trade in a range around the S$1.25 mark.


April 30, 2014 18

78

79

80

81

82

83

84

1.24

1.25

1.26

1.27

1.28

14/01 14/02 14/03 14/04

（JPY)（SGD) USD/SGD SGD/JPY


MAS currency policy; and the release of the GDP figures for January–March

Expected Ranges Against the US$: S$1.2450–1.2700


The U.S. dollar/Singapore dollar pair is expected to trade in a range in May amid a dearth of new

factors.

The major factors for the pair will remain U.S. economic trends and monetary policies. However,

even when FRB Chair Janet Yellen surprised the markets by making some hawkish comments after the

March FOMC meeting, dollar buying was short-lived and dollar interest rates soon fell. As this shows,

the market reaction to U.S. attempts to unwind monetary easing is becoming more muted when it

comes to both currency movements and interest rates. Judging from price movements alone, it certainly

seems that the Singapore unit’s downside room against the dollar is shrinking.

Monetary policy also suggests the Singapore dollar will remain bullish in May. In its April

monetary policy review, the MAS announced it would continue to guide the Singapore unit higher

based on the effective exchange rate (the breadth and central value of the policy band were left

unchanged, as was the pace at which it guides the unit higher). The accompanying statement also

warned that rising wages could place inflationary pressure on prices, so for the time being the MAS is

unlikely to change its stance of guiding the Singapore unit higher. With monetary policy maintained,

Singapore dollar buying looks set to continue this month. However, the current effective exchange rate

already seems to be inclined further in the direction of Singapore dollar strength than the policy band’s

central value, so as long as the unit’s major basket currencies (the euro, yen and RMB) do not surge


April 30, 2014 19

against the greenback, the unit’s room on the upside against the dollar will be capped at around S$1.24.

Key events in May include the release of the April export data (May 16) and the final GDP figures

for January–March (May 17).


April 30, 2014 20

Hiroshi Seki, Bangkok Treasury Department

Thai Baht – May 2014


The political situation in Thailand reached a standstill in April, while risk aversion also declined. As a

result, the dollar/baht pair weakened.

The pair began the month trading at Bt32.42. On the previous day, FRB Chair Janet Yellen had

indicated that the FRB was maintaining a cautious stance with regards to the U.S. jobs situation. This

led to a slide in expectations for an early U.S. interest rate hike. With China’s Manufacturing PMI for

March also rising on the previous month, Asian currencies were bought across the board, with the

dollar/baht pair dropping to Bt32.34. Concerns about the Thai political situation flared up on April 2

after: the pro-government faction announced it would be holding a large-scale rally at the weekend;

and news emerged that the Thai Constitutional Court had accepted a petition to have Prime Minister

Yingluck Shinawatra removed from office because she had unconstitutionally replaced the secretary

general of Thailand’s National Security Council (NSC). This news saw the currency pair trending

upwards again to hit Bt32.50 on April 3. It continued rising on April 4 to hit Bt32.55, a high for the

month.

However, the dollar saw some adjustive selling after the March U.S. employment data was released

during overseas trading time on April 4, so the pair dropped back to Bt32.45. At the weekend rally,

there were no significant clashes between pro- and anti-government factions. The markets reacted

warmly by buying the baht back when the Bangkok market returned from a holiday on April 8. As a

result, the pair dropped to Bt32.25. The dollar was then sold by exporters on April 9. The baht was also

bought following a decline in expectations for an early U.S. interest rate hike in the wake of the release

of the minutes to the FOMC meeting during overseas trading time. The pair subsequently dropped to a

monthly low of Bt32.15 on April 10.

Risk aversion then flared up after news emerged that Russian President Vladimir Putin might stop

supplying natural gas via Ukraine. This saw the pair bouncing back to temporarily hit Bt32.35 on April

11. During the Songkran (traditional New Year) holidays on April 14–15, the pair traded around

Bt32.30 amid a lack of any particularly significant news emanating from overseas.

The Chinese GDP data for January–March was released on April 16. At +7.4% year-on-year, the

results were by no means as bad as some had feared, so Asian currencies saw buying and the

dollar/baht pair dropped to Bt32.20. Risk appetite then intensified after: FRB Chair Janet Yellen

reiterated that low interest rates would be maintained for the time being; and U.S. stocks surged on the

back of the bullish results of the March U.S. Industrial Production Index and so on. Asian

emerging-market currencies saw buying as a result, with the dollar/baht pair falling to Bt32.16 on April


April 30, 2014 21

18. It then travelled in a narrow range in advance of the Easter holidays.

After the Easter holidays, the greenback was bought on the back of the healthy results of the U.S.

March Index of Leading Economic Indicators and a manufacturing index. This saw the currency pair

rising temporarily to Bt32.41 on April 23. However, the Bank of Thailand’s Monetary Policy

Committee (MPC) decided to keep interest rates fixed when it met on the same day. The Constitutional

Court also announced it would be giving the Prime Minister until May 2 to prepare a defense against

claims that she abused her authority when she replaced the secretary general of the NSC. Baht selling

eased off as a result, with the currency pair dropping to Bt32.24 on April 25 on the back of weekend

position adjustments.

From April 28 onwards, the pair moved in a narrow range between Bt32.20–30 in advance of the

FOMC meeting and the release of the U.S. employment data.

3.05

3.1

3.15

3.2

3.25

32

32.2

32.4

32.6

32.8

33

33.2

14/01 14/02 14/03 14/04

（JPY)（THB) USD/THB THB/JPY


The dollar/baht will move firmly on the back of the political instability that will follow a decision on the fate of Prime Minister Yingluck Shinawatra Expected Ranges Against the US$: BT32.00–33.00


The judicial and independent bodies who will decide Prime Minister Yingluck Shinawatra’s fate are set

to reach decisions between the end of April and the beginning of May. The National Anti-Corruption

Commission (NACC) is looking into whether the Prime Minister committed fraudulent acts in relation

to the rice pledging scheme, while the Constitutional Court will also reach a decision about whether

Yingluck acted unconstitutionally by replacing the secretary general of the NSC. If the NACC charges


April 30, 2014 22

the Prime Minister with dereliction of duty and calls upon the upper house to impeach her, Yingluck

will be suspended. If the Constitutional Court adjudges that the Prime Minister has acted

unconstitutionally, meanwhile, she will be kicked out of office. If either of these events happens, the

government/ruling party will have to choose an acting prime minister or a replacement prime minister

from the ranks of its seven deputy prime ministers. If the Constitutional Court orders the removal of the

entire cabinet, though, Thailand may end up with a political vacuum. If Yingluck is suspended or

removed from office, Suthep Thaugsuban, former deputy prime minister and current leader of the

anti-government protestors, has said he will select his own replacement prime minister and present a

list of cabinet ministers to King Bhumibol Adulyadej for approval. The government is being supported

by a faction close to former Prime Minister Thaksin Shinawatra. This faction has indicated its

opposition to the removal of the prime minister through legal maneuverings. It says it will hold

large-scale demonstrations when the Constitutional Court makes its decision and will fight any

attempts by Suthep and the anti-Thaksin faction to form a new government. There are indeed fears that

these legal decisions could lead to even fiercer conflict between the pro- and anti-Thaksin factions. The

markets will be worried about what direction the deadlocked political situation will take from here on.

Amid concerns that the political vacuum could drag on into the long term, several public and private

think tanks have lowered their GDP growth forecasts for 2014. It looks unlikely that the economic

outlook will be upgraded any time soon.

When the BoT’s MPC met on April 23, it voted by 6 to 1 to keep the policy rate fixed. At the last

meeting in March, the MPC had cut the rate by 0.25% for the first time in three and a half months in an

attempt to head off an economic slowdown caused by the political turmoil. This time around, only one

member has called for a 0.25% cut to support economic growth, with the other six members adjudging

that the currency policy rate was at an appropriate level and should be left unchanged. In the

accompanying statement, the BoT said that demand was dropping off due to political instability, with

the tourist industry also suffering. It also stated that although exports were showing signs of a recovery,

this was not strong enough to boost the overall economy, so the economic growth rate for 2014 could

well fall below the bank’s forecast. The BoT is aware that a rate cut could invite baht depreciation and

thus rising inflation. It also recognizes there are limits to how much monetary policy can do to mitigate

the impact of the political standstill. Nonetheless, some believe a further rate cut is needed and could

boost distressed private enterprise while providing a fillip to the capital markets. As a result, the

possibility of a further rate cut will continue to smolder away in the background throughout May.

At the same time, expectations for an early U.S. interest rate hike are fading away. With U.S.

economic indicators pointing to the firmness of the U.S. economy, the environment is becoming more

conducive to investing in risk assets. The Chinese economy is also growing steadily, despite the release

of several bearish Chinese economic indicators. This situation is making it easier to buy Asian

emerging-market currencies on the whole and is also acting as a positive factor for the baht. This risk

appetite is not strong enough to invite any one-sided buying of the baht, though, so the dollar/baht pair

is expected to fluctuate up and down in response to various events. Russia has begun military


April 30, 2014 23

maneuvers close to the border with Ukraine, so attention is focusing on the situation over there.

However, the Ukraine problem will probably not have a significant impact on the dollar/baht pair’s

movements. With the Thai political situation at a standstill, a lot will depend on the eventual fate of

Prime Minister Yingluck Shinawatra. There are fears that any decision will lead an intensification of

fighting between the pro- and anti-government factions, with the currency pair expected to move firmly

on the back of this political turmoil.


April 30, 2014 24

Takashi Miyachi, Singapore Treasury Department

Malaysian Ringgit – May 2014


The ringgit opened April trading at the upper-MYR3.25 level against the dollar. The unit fell

temporarily to the upper-MYR3.28 mark at the beginning of the month on the back of dollar

bullishness, though the greenback then weakened due to the bearish results of the U.S. employment

data for March. The ringgit hit a yearly high of mid-MYR3.21 on April 10. The dollar was bought back

slightly towards the end of the month, with the Malaysian unit sliding to the upper-MYR3.27 mark for

a time.

The Malaysian ringgit kicked off April trading at the upper-MYR3.25 mark against the U.S. dollar.

With overseas investors expected to pour funds into Malaysian stock markets, the ringgit saw buying at

the start of the month. However, dollar buying intensified as U.S. interest rates rose on the back of the

firm results of several U.S. economic indicators, so the Malaysian unit dropped to the upper-MYR3.28

level. The much-anticipated U.S. employment data for March was released on April 4. The results

dropped below expectations and U.S. interests rates subsequently fell back. The ringgit subsequently

opened trading the following week at the lower-MYR3.26 level. The unit continued to move firmly on

the back of expectations for fund inflows into Malaysia. On April 10, it hit a high for the year at the

upper-MYR3.21 mark. The same day saw the release of some worse-than-expected Chinese export

statistics for March, though. With U.S. stock markets also suffering sharp losses, the Malaysian unit

was adjusted down to the lower-MYR3.24 mark against the dollar. Singapore released its GDP data for

January–March on April 14. The results were down on the previous quarter and the Singapore dollar

weakened as a result, with the ringgit also dragged down to the lower-MYR3.25 level. The greenback

then strengthened following the release during overseas trading time of some better-than-expected U.S.

retail sales figures for March. The ringgit continued falling to hit the upper-MYR3.25 level on April 15.

Malaysian stock markets then saw seven consecutive business days of overseas investors’ buying on

balance, though, while China also released some better-than-expected GDP results for January–March

on April 16. All this saw the Malaysian unit rallying to the lower-MYR3.23 mark. From April 17

onwards, the unit moved with a lack of incentives amid thin trading over the Easter holidays. During

this time, the dollar was bought back slightly and the ringgit weakened to the MYR3.26 mark. Asian

currencies moved bearishly the following week and the ringgit also moved with a heavy topside. The

Chinese HSBC Manufacturing PMI data for April was released on April 23. As expected, the data had

improved a little, but the RMB remained bearish and the ringgit also continued sliding to hit the

upper-MYR3.27 mark on April 25.


April 30, 2014 25

30

30.5

31

31.5

32

32.5

3.2

3.25

3.3

3.35

3.4

14/01 14/02 14/03 14/04

（JPY)（MYR) USD/MYR MYR/JPY


U.S. interest rate movements and Malaysian monetary policy

Expected Ranges Against the US$: MYR3.22–3.30


In April the ringgit was swayed in particular by the dollar’s movements and the dollar in turn was

influenced by U.S. interest rates, so market participants should continue to pay attention to U.S.

economic trends and statements by U.S. monetary authorities. At the moment, the U.S. economy is on

the road to recovery once more after shaking off the ill effects of the bad weather. This situation is

likely to prove a negative factor for the Malaysian unit.

Meanwhile, the Chinese economy remains fraught with a number of risk factors, such as the

shadow banking sector and the unstable housing market. Furthermore, a number of Chinese officials

have recently poured cold water on the idea of any large-scale economic stimulus policies and seem to

be expecting a hard landing. However, recent economic indicators and so on continue to suggest that

the economy is bottoming out. At the very least, it is highly unlikely that a Chinese recession will

become a factor for the markets, so there will be a limit to how much the ringgit is sold due to

worsening Chinese economic conditions. The RMB is likely to continue trending downwards for the

time being, though. The ringgit has a relatively strong correlation to the RMB, so its topside is likely to

be capped accordingly.

Turning to Malaysia itself, and the March CPI data (released last month) rose 3.5% year-on-year.

Prices are continuing to trend upwards on the back of the fuel subsidy cuts and the hike in electricity

costs. Though soaring prices are starting to regain composure, most observers believe it will take a


April 30, 2014 26

considerable amount of time before inflation cools off. In a statement after the last Monetary Policy

Committee (MPC) meeting, Bank Negara Malaysia (Malaysia’s central bank) indicated it was aware of

ballooning household debt and said it would “continue to monitor for signs of destabilizing risks of

financial imbalances.” It also indicated that monetary tightening could be an option if debt continued to

increase, so it would be no exaggeration to say that a Bank Negara Malaysia interest rate hike is

becoming a realistic proposition. The fact that Malaysian short-term interest rates are edging upwards

seems to suggest that the financial markets are also focusing more on Bank Negara Malaysia’s

movements. From mid-March onwards, though, the ringgit has been supported by deep-rooted

expectations for fund inflows into the Malaysian stock market. Perhaps in reflection of recent sluggish

movements, ringgit volatility has fallen to its lowest level since January 2013. Under these

circumstances, the markets are likely to see more trading based on interest-rate differentials. The

ringgit beats the dollar in this respect, so this is one reason why the Malaysian unit will be bought in

May. Though the dollar/ringgit pair will remain sensitive to the movements of U.S. interest rates, May

will see a mixture of positive and negative factors for the ringgit on the whole. Considering how the

unit has been trending upwards since the start of the year, it seems likely it will move firmly this month

too, albeit within a range.


April 30, 2014 27

Satoshi Koizumi, PT. Bank Mizuho Indonesia

Indonesian Rupiah – May 2014


The Indonesian rupiah dropped back in April. After starting the month around IDR11,280, the

dollar/rupiah pair continued to hover around IDR11,300 on the back of firm stock and bond

movements up until the April 9 general election. At the general election though, the Indonesia

Democratic Party of Struggle (PDIP), the party of the presidential candidate Joko Widodo

(affectionately known as ‘Jokowi”), took only 19% of the vote, far less than its goal of 27%. As stocks

and bonds slumped, the currency pair rose to the IDR11,400 mark. The rupiah’s slide accelerated at the

month’s end due to import settlements, the investors’ remittances of dividends and royalties to their

home countries, and portfolio investment outflows. As a result, the Indonesian unit fell to a roughly

two-month low around IDR11,650.

0.82

0.84

0.86

0.88

0.9

0.92

0.94

11250

11550

11850

12150

12450

14/01 14/02 14/03 14/04

（JPY)（IDR) USD/IDR IDR/JPY


Movements ahead of the presidential election; and portfolio investment trends

Expected Ranges Against the US$: IDR11,400–11,800

Against the yen: IDR110.00–116.00

The dollar/rupiah pair is expected to trade unstably in May, too. Jokowi remains the favorite to win the


April 30, 2014 28

presidential election, but if the poor showing of the PDIP is anything to go by, the “Jokowi Effect”

failed to work during the general election. This probably induced a sense of disappointment among

overseas investors.

If efforts to form a coalition run into trouble in advance of the July presidential election, this could

lead to portfolio investment outflows, so the rupiah looks set to continue trading erratically. The rupiah

had been trending upwards on the back of portfolio investment inflows since February onwards, so

market participants should watch out for any sharp unwinding.

3. Topics The February trade balance

Though Indonesia posted a trade deficit in January, this turned into a surplus to the tune of around $780

million in February. However, exports were down around 3.0% and imports down 10.0% on the same

month last year, so this surplus seems to be due to a slide in imports.

Considering the rupiah’s depreciation from mid-2013 onwards, a fall in imports seems perfectly

natural. This now seems to be chipping away at Indonesia’s chronic trade deficit. However, private

consumption, which accounts for over 50% of Indonesia’s GDP, may also be on the slide, so a trade

surplus based on falling imports is by no means a healthy phenomenon. From here on, if the fall in

imports continues to outpace the fall in exports just like it did in February, Indonesia will theoretically

be able to maintain this trade surplus. This would also mean, though, that the amount of trading as a

whole was shrinking. This would result in a slide in the GDP growth rate, a stagnant Indonesian

economy and an increase in the unemployment rate. At the end of the day, it would be best of

Indonesia could shore up its export base.


April 30, 2014 29

Yasunori Sugiyama, Manila Branch

Philippine Peso – May 2014


Foreign exchange market

FRB Chair Janet Yellen exhibited a cautious attitude regarding the current employment conditions in

the U.S. at a lecture held in the evening of Monday, March 31. In this speech, she emphasized her

intention to continue the measures of quantitative monetary easing for “some time.” Her dovish view was

unexpected in the market, as it seemed like a sudden change from what she said at the press conference

after the previous FOMC meeting. The expectations for measures of monetary easing in the U.S.

impacted the U.S. dollar/Philippine peso market in favor of the peso. As a result, the U.S. dollar/peso pair

opened monthly trading on Tuesday, April 1 at PHP 44.75, with a peso slightly stronger than PHP

44.82—the closing rate of the previous day. The peso continued appreciating thereafter to reach PHP

44.72 to the U.S. dollar. However, the U.S. interest rate market started to reflect strong figures in the

March employment statistics of the U.S. that were due to be released on April 4. Thus, interest rates

started to rise even before the release of the employment statistics. In reaction to this, U.S. dollar-buying

became dominant in the U.S. dollar/peso market. On Thursday, April 3, the U.S. dollar recovered to the

PHP 45.00 level. However, market participants remained cautious about U.S. dollar-selling interventions

by the central bank of the Philippines, keeping the U.S. dollar from appreciating further than PHP 45.05.

The U.S. dollar/peso exchange rate remained at the same level thereafter, as market participants were

waiting for the March employment statistics of the U.S. to be released. Trading closed on Friday, April 4

at PHP 44.94 to the U.S. dollar.

On Monday, April 7, the U.S. dollar/peso pair opened trading at PHP 44.85 with a slightly stronger

peso than the closing rate at the end of the previous week. The March employment statistics of the U.S.

were released at the end of the previous week, revealing that the number of non-agricultural employees

had increased by 192,000 compared to the previous month. As the estimate was an increase of 200,000,

pessimistic sentiment grew in the market, leading the U.S. interest rate to fall as well. After the weekend,

the U.S. dollar/peso exchange market was generally dominated by U.S. dollar-selling and peso-buying on

April 7 due to the fall in U.S. interest rates. The peso continued appreciating and reached PHP 44.70 to

the U.S. dollar by Tuesday, April 8. While the Manila market was closed on Wednesday, April 9, the U.S.

dollar depreciated further against emerging currencies, along with the further depreciation of U.S. interest

rates, which resulted from the dovish view indicated in the minutes of the FOMC meeting as released

during the U.S. trading hours of the same day. Following this trend, the peso strengthened further after

the Philippine national holiday, and the U.S. dollar/peso exchange market opened at PHP 44.55 on

Thursday, April 10. Just after market opening, the February export value of the Philippines was


April 30, 2014 30

announced with a growth of 24.4% year-on-year, which also encouraged market participants to buy the

peso. Thus, U.S. dollar-selling and peso-buying remained dominant in the U.S. dollar/peso exchange

market thereafter. The peso then appreciated to reach PHP 44.27 to the U.S. dollar. Even though market

participants adjusted their positions on Friday, April 11, the following day, leading the U.S. dollar/peso

exchange rate to return to PHP44.50, the urge to buy the peso remained vigorous and the exchange rate

fell again to PHP 44.24 to the U.S. dollar. In the end, trading closed for the week at PHP 44.28.

On April 12 and 13, there was an armed clash between pro-Russian protesters and the interim

government of Ukraine in eastern Ukraine, resulting in casualties. After the weekend, the financial

market opened weekly trading with growing risk-averse sentiment, negatively reacting to the tightening

tension in the situation in Ukraine. The U.S. dollar/peso exchange market opened on Monday, April 14 at

PHP 44.39 with a stronger U.S. dollar compared to the closing rate at the end of the previous week. U.S.

dollar-buying remained dominant thereafter. Then, the March retail sales of the U.S. were released in the

evening of April 14 with a stronger-than-expected figure. The March Consumer Price Index of the U.S.

was also released on Tuesday, April 15, also exceeding the estimated level. In reaction to this, the U.S.

dollar interest rates started to appreciate. Thus, market participants expected the future interest rates to be

even higher, and U.S. dollar-buying was encouraged. As a result, the U.S. dollar/peso exchange rate rose

to PHP 44.57. However, the January–March GDP of China was announced on Wednesday, April 16,

recording positive growth of 7.4% year-on-year and exceeding the estimated 7.3%. A feeling of relief

thus hit the market, fuelling risk-taking sentiment and encouraging peso-buying. As a result, the peso

appreciated slightly and the U.S. dollar/peso exchange rate remained at the PHP 44.40 level.

However, the market was relatively inactive before the Easter holidays, which are important holidays

for the Philippines—a Catholic country. Trading closed at PHP 44.43 to the U.S. dollar on Wednesday,

April 16, before the four consecutive public holidays over the Easter long weekend.

After the Easter holidays, the U.S. dollar/peso pair resumed trading at PHP 44.40 on Monday, April 21.

However, there were few factors to impact the market and the exchange rate did not move into any

direction. The U.S. dollar/peso exchange rate has been fluctuating at the mid-PHP 44 level (as of April

23).

Interest rates

The March Consumer Price Index of the Philippines was announced on Friday, April 4, recording a

growth of 3.9% year-on-year, falling below the growth rate of the previous month by 0.2 points. This

means that inflation has slowed down for the second consecutive month, mainly due to the slowdown in

the appreciation of the price of alcoholic beverages, cigarettes, and public utilities, such as electricity.

This result supported the judgment made at the regular monetary policy meeting of the central bank of

the Philippines held on March 27 that concluded that the inflation rate remains stable.

However, at the short-term Treasury bill auction held on Monday, April 7, 91-day bills settled at

1.440%, exceeding the interest rate observed at the previous auction (held on March 3) by 0.440%,

181-day bills settled at 1.696%, exceeding the interest rate observed at the previous auction by 0.296%,


April 30, 2014 31

and 364-day bills settled at 1.972% with an increase of 0.107% from the interest rate observed at the

previous auction. With the appreciation of U.S. interest rates, market participants tended to seek higher

yields for Philippine government bonds that reflect the future appreciation of interest rates.

Even though the inflation rate has been stable in the past several months, it has been increasingly likely

for the policy interest rate (SDA rate), which has been kept at the same level for a long time, to be revised,

given the growth in the inflation rate that resulted from the damage caused by the typhoon in November

last year as well as the strength in the Philippine economy led by personal consumption. The central bank

of the Philippines has set out the inflation target rate for 2014 at 3.0–5.0%, the same level as the previous

year. Although the inflation rate has currently been within the target range, interest rate hikes would be

necessary not only to control inflation but also to keep the peso from depreciating if interest rates

continue rising in the U.S. in an accelerated manner. At the monetary policy regular meeting of the

central bank of the Philippines held in March, the policy interest rates (including the SDA rate) were kept

at the existing level. However, the central bank decided to raise the deposit reserve requirement ratio

from 18% to 19%, which means that the central bank has slowly started to collect liquidity in the market.

While it is highly dependent on the trends in the U.S. interest rate market, an interest rate hike in the

Philippines is possible by the middle of 2014 (as of April 23).

Stocks

In the Philippine stock market, the PSEi opened trading on Tuesday, April 1 at PHP 6,429.56. FRB

Chair Janet Yellen made a remark that emphasized that measures of monetary easing would continue to

be necessary for some more, at a lecture held in the evening of Monday, March 31, which led stock

prices in the emerging markets to appreciate. Following this trend, stock prices in the Philippines started

rising on April 1. The PSEi then exceeded the 6,500 mark, the psychological turning point for market

participants, already on April 1. Even though the March employment statistics of the U.S. were released

on Friday, April 4, with strong figures, they were not as strong as expected, and therefore the stock

market in the Philippines remained robust. As a result, the PSEi reached the PHP 6,600 level on Monday,

April 7.

The minutes of the FOMC meeting were released in the evening of Wednesday, April 9, making an

interest rate hike in the U.S. unlikely. Furthermore, the January–March GDP of China was announced on

April 16 with a higher-than-expected growth rate of 7.4%. As this result swept away concerns over the

Chinese economic slowdown, which was keeping Asian stock prices from appreciating, the trend was

reversed and the PSEi started appreciating. After the Easter holidays, the PSEi reached the PHP 6,700

level on Monday, April 21. The PSEi even momentarily reached the PHP 6,800 level with constant

strength.

Since around the end of March, overseas investors continued actively investing in Philippine stocks,

recording net buying by overseas investors for 17 consecutive business days until April 22. Investment

capital has been flowing back into the Philippines, as market participants are no longer expecting the U.S.

interest rates to appreciate in the times ahead (as of April 23).


April 30, 2014 32

2.2

2.25

2.3

2.35

2.4

44.2

44.4

44.6

44.8

45

45.2

45.4

45.6

14/01 14/02 14/03 14/04

（JPY)（PHP) USD/PHP PHP/JPY


Even though the outlook depends on the trends in the U.S. interest rate market, the U.S. dollar/Philippine peso exchange rate is likely to appreciate only to a limited extent, as investment capital is flowing into the Philippines by overseas investors, while the amount of OFW remittances is expected to reach its peak for the first half of the year.

Expected Ranges Against the US$: PHP 43.50–44.50

Against the yen: JPY 2.20–2.39

After the FOMC meeting held in March, FRB Chair Janet Yellen made a remark that the interest rate

would be raised in six months after the FRB ends its measures of monetary easing, leading market

participants to expect interest rates in the U.S to be higher in the times ahead. As a result, the U.S.

dollar/peso exchange rate reached the PHP 45.00 level in March. After reaching PHP45.35 to the U.S.

dollar, the peso started gradually appreciating against the U.S. dollar, as the above view of FRB Chair

Janet Yellen was corrected according to the employment statistics and because the minutes of the FOMC

meeting were released.

Even though the situation in Ukraine remained a factor of instability in the market, it was an indirect

factor for the Philippine market. On the other hand, the uncertainty in the Chinese economy has been a

major factor for the Philippine market.


April 30, 2014 33

However, Chinese economic indices released in April did not show strikingly weak figures, which in

the end gave market participants a sense of relief for the time being, although concerns over an economic

slowdown persist. As a result, investment capital is also flowing back to Philippine stocks and bonds

from overseas investors.

With regard to the Philippine economy itself, the GDP growth rate remains high, and the March

inflation rate recorded a decline for the second consecutive month. Therefore, the Philippines should be

able to enjoy its high growth without inflation once the situation has been stabilized outside of the

Philippines.

Around 10 million people, an equivalent of around 20% of the total working population of the

Philippines, are working abroad, such as in the U.S. and the Middle East, and these OFWs (Overseas

Filipino Workers) remit funds to the Philippines, supporting domestic consumption and leading the

economic growth of the country. OFW remittances also contribute to keeping the international balance of

payments of the Philippines healthy by creating a surplus in the current account by making up for the

trade deficit. It would therefore be possible to say that the Philippine has been running a global “worker

dispatch business” at a national level.

The amount of OFW remittances has been growing rapidly by 6–8% year-on-year. As foreign

currencies are remitted and always converted to the peso through foreign currency-selling and

peso-buying in the Philippines, the amount of OFW remittances has been the most important factor for

the U.S. dollar/peso exchange market by encouraging U.S. dollar selling.

The amount of OFW remittances is seasonally variable and peaks in the October–December period, as

people prepare for the Christmas holidays. During this period last year, the peso did not depreciate

significantly even when other emerging currencies depreciated globally against the U.S. dollar with

growing expectations for QE tapering to start, thanks to U.S. dollar-selling through OFW remittances that

supported the peso. On the contrary, the peso deprecated to the PHP 45 level against the U.S. dollar when

emerging currencies were sold because of the uncertainty in emerging countries in January–February this

year. This is due to the fact that it was the period from January to March that saw the lowest amount of

OFW remittances in a year.

In the period from April to June, the amount of OFW remittances usually peaks in the first half of the

year. As the school year starts in June in the Philippines, the amount of remittances tends to increase in

order to prepare for the new academic year. Thus, this year, the amount of remittances is expected to

continue increasing by 6% year-on-year. That is why the peso does not easily depreciate excessively

against the U.S. dollar even when market participants expect the U.S. dollar interest rates to be higher in

the times ahead.

With regard to the Philippine economy, the October–December GDP was slightly weaker at 6.5%, due

to the damage caused by Typhoon Haiyan, which hit the Visayans in the central Philippines in November.

However, the country achieved a high growth rate at 7.2% in 2013. The World Bank expects the GDP

growth rate of the Philippines to be 6.6% in 2014. The Philippine economy is dependent on personal

consumption, which accounts for 70% of the country’s GDP, and consumption is largely dependent on


April 30, 2014 34

OFW remittances. As the amount of OFW remittances continues to grow, domestic consumption remains

vigorous. As the manufacturing industry in the Philippines is weak, the country is dependent on imports

even for goods to be consumed within the country. As a result, the trade balance of the Philippines

inevitably faces a deficit. However, OFW remittances make up for the trade deficit as non-recurring

income, maintaining a current account surplus. Such a situation differentiates the Philippines from other

emerging countries, such as India, Indonesia, and Brazil, and thus the fiscal balance of the Philippines

remains extremely healthy.

It is uncertain for how long investment capital will continue flowing into the Philippines from overseas

investors, as it did in April. Even though the peso has not appreciated against the U.S. dollar as much as

stock prices have appreciated, more foreign capital may start flowing into the Philippines as a result of

the more active conversion of foreign currencies to the peso once the U.S. dollar interest rate market has

been stabilized

The peso is expected to start appreciating again, thanks to healthy economic conditions, which are

likely to lead foreign capital to flow into the Philippines in the long run. However, that is unlikely to

happen before the second half of the year. At the moment, the U.S. dollar has been strong, with dominant

expectations for the U.S. dollar interest rates to appreciate in the times ahead. While the situation is

highly dependent on economic conditions in the U.S., the U.S. dollar is expected to remain strong for the

time being, with expectations for U.S. interest rates to be higher in the times ahead.


April 30, 2014 35

Yuki Katsumata, Heekyoung Jung, Seoul Treasury Department

Korean Won – May 2014


The Korean won appreciated against the U.S. dollar in April, and the U.S. dollar/won exchange rate

fell to its lowest level since 2008.

At the end of March, North Korea released a statement that the country may carry out a “new form” of

nuclear test. While geopolitical risks grew with North Korean missiles falling in the sea area of South

Korea, the reaction in the market was limited. The U.S. dollar/won pair opened trading at the KRW 1,060

level, and the downward pressure on the exchange rate grew gradually. The U.S. dollar/won exchange

rate fell to the mid-KRW 1,050 level thereafter, as a result of a dovish speech given by FRB Chair Janet

Yellen as well as due to the result of the March trade balance of Korea, which turned out to be stronger

than expected. Even though the March employment statistics of the U.S. were generally as expected, the

U.S. dollar depreciated because of a decline in U.S. interest rates. Following this trend, the U.S.

dollar/won exchange rate approached KRW 1,050 before rallying due to a cautious attitude in the market.

On April 9, however, trading opened at the KRW 1,046 level, the lowest level observed this year, due

to the depreciation of the U.S. dollar in overseas markets. As there was also capital flow related to

security investment, which led the won to appreciate further, and the U.S. dollar/won exchange rate

continued falling with some stop-loss orders from short-term investors. Thereafter, Bank of Korea

Governor Lee Ju Yeol made a remark that the central bank of Korea has been carefully observing the

foreign exchange market. However, the reaction to this remark was limited in the market, and the

exchange rate fell to KRW 1,031.4 to the U.S. dollar on April 10. The Korean Monetary Committee

meeting was held on the same day, and the committee decided to maintain the existing monetary policy,

to which there was no specific reaction in the market. However, the U.S. dollar/won exchange rate

reached the KRW 1,040 level again as a result of the weak trade statistics of China, as well as U.S.

dollar-buying, which is considered to be market intervention by the Korean monetary authorities.

While market participants grew more cautious, waiting for the release of a series of economic indices

from China (such as GDP, retail sales, and industrial production, etc.), scheduled for April 16, the U.S.

dollar/won exchange rate rallied to the KRW 1,044 level. However, the exchange rate rose only to a

limited extent because of the fact that the GDP exceeded the expected level, albeit slightly, as well as

because there were rumors about won-buying from a certain public institution.

Thereafter, the U.S. dollar/won exchange rate continued fluctuating in both directions at around KRW

1,040. However, in the second half of the month, exporting companies that were not selling U.S. dollar

started to sell the U.S. dollar intermittently. As a result, the U.S. dollar/won pair has been trading at the

KWR 1,031 level again as of April 29.


April 30, 2014 36

9.2

9.4

9.6

9.8

10

1030

1040

1050

1060

1070

1080

1090

14/01 14/02 14/03 14/04

（JPY)（KRW) USD/KRW KRW/JPY


The Korean won is expected to continue appreciating with some interventions to adjust the exchange rate.

Expected Ranges Against the US$: KRW 1,010–1,055

Against the yen: JPY 9.66–10.20 (KRW100)

(KRW 9.80–10.35)

The U.S. dollar/Korean won exchange rate fell below the KRW 1,050 level in April. The exchange

rate had previously rallied many times before reaching this level. Thus, the exchange rate reached its

lowest level in around five years. Although the previous review predicted that the U.S. dollar would

remain strong, the U.S. dollar depreciated against the won, in the end. Even though the previous review

rightly predicted robust U.S. dollar-buying as a result of dividend remittances from Korean companies as

well as the further depreciation of the Chinese yuan, it seems that the downward pressure on the

exchange rate was stronger. This is due to the fact that demand for the won was more vigorous than

expected, while more investors thought the won to appreciate from a medium-to-long term perspective.

Overseas investors have been investing again in the stock market in Korea, and the KOSPI has once

recovered to the 2,000-point level. With regard to the bond market, on the other hand, investment from

the U.S. has been on a decline, while investment from Europe has been making up for such decline.

Furthermore, a major bank that used to promote U.S. dollar-buying and Korean won-selling proposed

to close those positions, while another financial institution revised its medium-to-long term estimate for


April 30, 2014 37

the U.S. dollar/won exchange rate toward a stronger won. These factors are likely to have impacted

investor outlook significantly.

Given the remark of the Bank of Korea’s new governor, Lee Ju Yeol, as well as the contents of the

minutes of the Monetary Policy Committee meeting, it is considered almost impossible for the interest

rate to be cut, although at some point there were such rumors in the market. The stability in the won

exchange market is thus relatively easy to maintain for the time being.

With regard to U.S. dollar-buying interventions by the Korea monetary authorities, aggressive actions

are unlikely, as the Korean monetary authorities are currently attempting to boost domestic demand while

remaining cautious about the reaction of the IMF and the U.S. The Korean monetary authorities are

therefore unlikely to do much more than intervene in the market only in order to slow down a certain

trend.

Even though the FRB is expected to continue tapering its asset purchase program, it is unlikely to

consider an interest rate hike for the time being. Therefore, the Korean won is likely to continue

appreciating against the U.S. dollar, as has currently been the case.


April 30, 2014 38

Junji Tsujino, Taipei Treasury Department

New Taiwan Dollar – May 2014


The U.S. dollar/NT dollar exchange market started to again follow trends in the U.S. dollar and

Korean won exchange markets.

The NT dollar appreciated against the U.S. dollar in April, as the NT dollar exchange market started

closely following the Korean won exchange market while the U.S. dollar was weakening after the press

interview of FRB Chair Janet Yellen held after the FOMC meeting in March.

The U.S. dollar/NT dollar pair opened trading in April at the TWD 30.40 level. The U.S. dollar/NT

dollar exchange rate continued rallying after hitting TWD 30.60 at the end of the previous month. On

April 1, the NT dollar appreciated to temporarily reach the lower-TWD 30.30 level, in reaction to the

release of Chinese economic indices as well as the appreciation of the Korean won. NT dollar buybacks

continued on April 2, and the U.S. dollar/NT dollar exchange rate temporarily reached TWD 30.255. On

April 3, the appreciation of the NT dollar slowed down slightly, as the depreciation of the U.S. dollar

decreased as a result of the strong figures in the March ADP employment statistics of the U.S. that were

released on the previous day. On April 7, the March employment statistics of the U.S. were released, but

the results were weaker than the estimated level, which led the NT dollar to appreciate again. The U.S.

dollar/NT dollar exchange rate remained stable at the mid-TWD 30.20 level. On April 8, Korean

won-buying increased in the afternoon, which led the NT dollar to appreciate. As a result, the U.S.

dollar/NT dollar exchange rate temporarily reached the TWD 30.10 level. On April 9, the U.S. dollar

depreciated because of Japanese yen-buying and U.S. dollar-selling, which was encouraged by the

remark made by the governor of the Bank of Japan at the press conference held on the previous day.

Consequently, NT dollar-buying increased, and the U.S. dollar/NT dollar exchange rate reached TWD

30.03. On April 10, the U.S. dollar continued depreciating because of the contents of the minutes of the

FOMC meeting held on the previous day, leading the NT dollar to appreciate further. Just after the

market opening, the U.S. dollar/NT dollar exchange rate fell below TWD 30 for the first time since the

middle of January this year. The NT dollar reached TWD 29.91 to the U.S. dollar. However, market

participants sold stocks thereafter, and the U.S. dollar/NT dollar exchange rate recovered to the TWD 30

level on the same day.

Toward the middle of the month, the exchange rate slowed down in falling, while the Korean won was

on an uptrend. On April 11, the correlation temporarily weakened between the NT dollar exchange

market and the Korean won exchange market. As a result, the U.S. dollar/NT dollar exchange rate

approached TWD 30.10. On April 14, the NT dollar depreciated against the U.S. dollar to the TWD

30.20 level, following the U.S. dollar rallying against the euro due to the fact that the ECB governor gave


April 30, 2014 39

a warning regarding the depreciation of the euro on the previous weekend. On April 15 as well, trading

opened at around TWD 30.25 to the U.S. dollar, with a weakening NT dollar because of the March retails

sales of the U.S. announced on the previous day. However, the Japanese yen rallied after the dialogue

between the Prime Minister of Japan and the Governor of the Bank of Japan. In reaction to this, the NT

dollar was bought back and the U.S. dollar/NT dollar exchange rate reached the lower-TWD 30.10 level.

On April 17 and 18, the NT dollar appreciated during the morning because of the speech made by FRB

Chair Janet Yellen as well as because the announcement of the number of unemployment insurance

claims in the U.S. However, the U.S. dollar/NT dollar exchange rate slowly returned to and remained at a

level just below TWD 30.20 to the U.S. dollar.

Toward the second half of the month, the correlation weakened between the NT dollar exchange

market and the U.S. dollar and Korean won exchange markets. The NT dollar depreciated slightly with

unique factors. On April 21, market liquidity was relatively low because of the Easter holidays. In the

meantime, the NT dollar continued depreciating to the upper-TWD 30.20 level. The U.S. dollar/NT

dollar exchange rate has been moving in both directions at around TWD 30.20–30.30 against the U.S.

dollar without violent fluctuations, as market participants were waiting for the announcement of the U.S.

economic indices scheduled for the beginning of the coming month as well as some key events after

April 23.

Toward the end of the month as well, the U.S. dollar continued depreciating, while the Korea won

continued appreciating. On the other hand, the NT dollar exchange market reached a stalemate with the

new nuclear plant issue. However, the NT dollar exchange market followed the Korean won exchange

market when the Korean won reached its monthly high. Thus, the U.S. dollar/NT dollar exchange rate

fell below TWD 30.20.

In April, the NT dollar/Japanese yen exchange rate continued fluctuating in both directions around the

JPY 3.40 level, as trends in the U.S. dollar/Japanese yen exchange market and the U.S. dollar/NT dollar

exchange market were generally the same.

The NT dollar/Japanese yen pair opened trading in April at a level below JPY 3.40. The Japanese yen

continued depreciating, and the NT dollar/Japanese yen exchange rate reached the mid-JPY 3.40 level at

the beginning of the month, as the NT dollar was appreciating against the U.S. dollar while the Japanese

yen was depreciating against the U.S. dollar.

Toward the middle of the month, the Japanese yen was bought back while the stock market was being

adjusted, and the Japanese yen appreciated to the mid-JPY 3.30 level against the NT dollar.

Toward the second half of the month, the NT dollar depreciated slightly against the U.S. dollar.

However, the NT dollar/Japanese yen exchange rate did not move from the mid-JPY 3.30 level, as the

U.S. dollar/Japanese yen exchange rate continued fluctuating in both directions after recovering to the

JPY 102 level.


April 30, 2014 40

3.3

3.35

3.4

3.45

3.5

3.55

29.6

29.8

30

30.2

30.4

30.6

30.8

14/01 14/02 14/03 14/04

（JPY)（TWD) USD/TWD TWD/JPY


Even though the depreciation of the U.S. interest rate and consumer price appreciation are factors for the appreciation of the NT dollar, the NT dollar is expected to remain sensitive to factors for the depreciation.

Expected Ranges

Against the US$: NT$ 29.90–30.60


When the U.S. dollar/NT dollar exchange rate approaches TWD 30.00 in May, the NT dollar is

expected to be less sensitive to factors for the appreciation while remaining sensitive to factors for the

depreciation.

Major economic indices released in April include the following. Period Result Period Result Period Result Export value (YOY, converted into USD)

March +2.0% February +7.9% January –5.3%

Export orders (YOY, converted into USD)


Industrial production (YOY)


Unemployment rate (seasonally adjusted)

March +4.06% February +4.05% January +4.07%


April 30, 2014 41

Consumer Price Index (YOY)

March +1.61% February –0.05% January +0.83%

The export value has been stable, and the accumulative trade surplus has increased by USD 1.826

billion year-on-year by March, exceeding the pace of the previous year, which recorded the all-time high.

The deficit in trade with Japan has been shrinking, which continues to contribute to the expansion of the

trade surplus. The deficit in trade with Japan has decreased by USD 1.093 billion since last year. At the

moment, there are no signs of improvement in the trade balance of Japan, and it has been said that the

problem of Japan’s trade deficit will not be solved even if the energy problem is resolved. It can be said

that the gradual shrinking deficit in Taiwan’s trade with Japan symbolizes the situation.

The Consumer Price Index rallied significantly in March, recording a year-on-year increase of 1.61%.

However, the growth was mainly due to the high growth of 5.6% year-on-year in food prices, which

account for 25% of the index and which resulted from the increase in pork prices. Thus, the growth rate

of consumer prices excluding food remains at around zero. The increase in pork prices was caused by the

spread of an infectious disease in pigs, which has been gradually reflected in the consumer prices. Even

though this is likely to impact the consumer prices for a while, the potential risks of deflation persist.

The NT dollar had been expected to be less sensitive to factors for the appreciation in order to defend

the net assets of the central bank while carrying out sterilized interventions for the purpose of monetary

easing. However, the NT dollar reacted sensitively to the depreciation of the U.S. dollar in April. It has

been considered that the NT dollar exchange market started to again follow the U.S. dollar exchange

market mainly for two reasons: the falling interest rates for the U.S. government bonds and the rise in

consumer prices discussed above. For the central bank of Taiwan, which holds a large amount of U.S.

government bonds, the risks of investment asset value fluctuations are as significant as foreign exchange

rate risks. However, the price of 10-year U.S. government bonds has continued to rise after hitting the

bottom at the beginning of the year, and the total increase has been around 3% so far. While there are

many special factors related to the consumer price, the Consumer Price Index recorded a relatively high

growth of 1.61% year-on-year in the March statistics. Looking at the past trend, the Consumer Price

Index recorded an increase of nearly 2% in the spring of 2012, and the NT dollar appreciated temporarily

in reaction to this. In any case, however, the price of U.S. government bonds is likely to fall again while

the growth of consumer prices is also likely to slow down again, which makes it unlikely for the NT

dollar to continue appreciating further. After reaching the TWD 30.00 mark, the NT dollar is unlikely to

appreciate further, while it is likely to depreciate immediately at times of the appreciation of the U.S.

dollar.


April 30, 2014 42

3. Topics The occupation of the chambers of the Legislative Yuan has ended.

On April 10, students ended their occupation of the chambers of the Legislative Yuan, which has been

occurring since the middle of March in protest against the service trade pact with China. Given the

protest of the students, the Taiwanese government started to draft a law to monitor the pact to be

concluded on both sides and gave Cabinet approval to the law on April 4. However, the approved

contents of the law were significantly different from what has been proposed by the students and did not

resolve the problem. However, on April 6, Legislative Speaker (chairperson of the National Assembly)

Wan Jing Pyng visited the chambers of the Legislative Yuan and explained that the service trade pact

with China would not be discussed further until the monitoring law has been passed, asking the students

to free the chambers. The students saw this as progress in the situation and left the chambers on April 10.

In the times ahead, the government of Taiwan will aim to finish revering both the monitoring law and the

service trade pact with China by the end of the legislative session in June. The matters that have been

approved so far include article-by-article discussion. Each article needs to be discussed in detail, and

while this has been practiced, there is the problem of major delay in the discussion process because of

this principle of article-by-article discussion. As a result, the ruling party attempted to start voting

without following this rule, which was the cause for the protest. As the opposition party is expected to

take some actions in preparation for the nationwide local elections scheduled for November, the

important question remains whether the pact will be concluded before the end of this legislative session,

which is approaching fast.


April 30, 2014 43

Takahiko Sasaki, Hong Kong Treasury Department

Hong Kong Dollar – May 2014


Hong Kong dollar spot exchange market in April: The Hong Kong dollar gradually appreciated.

In April, the Hong Kong dollar gradually appreciated. At the beginning of the month, trading opened

at around HKD 7.7580 to the U.S. dollar. Thereafter, the U.S. dollar continued depreciating, and the U.S.

dollar/Hong Kong dollar exchange rate fell below the HKD 7.7540 level in the middle of the month for

the first time in three months. Furthermore, the minutes of the FOMC meeting were more dovish than

expected in the market, in reaction to which the Hong Kong dollar appreciated while the U.S. dollar was

depreciating. The Hong Kong dollar continued appreciating to temporarily reach the HKD 7.7510 level

to the U.S. dollar for the first time since December last year. The Hong Kong dollar depreciated slightly,

as the U.S. dollar was bought back. Trading closed on Tuesday, April 22, local time, at HKD 7.7528 to

the U.S. dollar (versus HKD 7.7565 at the end of the previous month).

Hong Kong dollar short-term interest rates in April: The Hong Kong dollar short-term interest

rates remained generally low with sufficient fund supply in Hong Kong, with low short-term

interest rates in the U.S.

As has been the case so far, the Hong Kong dollar short-term interest rates in April remained generally

low, with low short-term interest rates in the U.S. as well as sufficient fund supply in Hong Kong.

Trading closed on Tuesday, April 22, with the one-month HIBOR at 0.21376% (versus 0.20857% at the

end of the previous month), the three-month HIBOR at 0.37571% (versus 0.37429% at the end of the

previous month), and the one-year interest rate at 0.86429% (versus 0.87071% at the end of the previous

month).

Hong Kong stock market in April: Stock prices in Hong Kong appreciated for some time, with

expectations for measures of economic stimulus, after which the market remained weak.

The benchmark Hang Seng Index in April once fell below 22,500 at the beginning of the month.

However, toward the middle of the month, stock prices continued rising thanks to expectations for

economic stimulus measures. The index once reached 23,224.54, reaching the 23,000 level, for the first

time since January this year. Even though the GDP of China was announced thereafter, revealing a

better-than-expected figure, market participants still confirmed the slowdown of Chinese economic

growth. As a result, stock prices stared to falling toward the end of the month. In the end, the Hang Seng

Index closed trading on Tuesday, April 22 at 22,730.68 (versus 21,798.24 at the end of the month).


April 30, 2014 44

12.9

13.1

13.3

13.5

13.7

7.752

7.754

7.756

7.758

7.76

7.762

7.764

7.766

7.768

14/01 14/02 14/03 14/04

（JPY)（HKD) USD/HKD HKD/JPY


The U.S. dollar/Hong Kong dollar exchange rate is expected to fluctuate within a narrow range.

Expected Ranges Against the US$: HK$ 7.750–7.7580


Hong Kong dollar spot exchange market in May: The U.S. dollar/Hong Kong dollar exchange

rate is expected to fluctuate within a narrow range.

The U.S. dollar/Hong Kong dollar exchange rate is forecast to fluctuate within the range of HKD

7.7500–7.7580. As the GDP of China was not as weak as expected, there are no more factors to lead the

Hong Kong dollar to significantly depreciate. Furthermore a large-scale IPO has been scheduled. Thus,

the Hong Kong dollar is expected to continue appreciating. However, the U.S. dollar/Hong Kong dollar

exchange rate is approaching HKD 7.7500 to the U.S. dollar, the lower end of the fluctuation range

accepted in the monetary policy, which makes it likely for investors, short-term investors in particular, to

actively place positions to buy the U.S. dollar and sell the Hong Kong dollar in the times ahead. With

those positions, the U.S. dollar/Hong Kong dollar exchange rate is expected to remain within a limited

range.

Hong Kong dollar short-term interest rates in May: As has been the case so far, the Hong Kong

dollar short-term interest rates are expected to remain generally low, thanks to sufficient funds in

Hong Kong as well as low interest rates in the U.S.


April 30, 2014 45

As has been the case so far, the Hong Kong dollar short-term interest rates are expected to remain

generally low in May, thanks to sufficient funds in Hong Kong as well as low interest rates in the U.S.

3. Topics There are gaps in everyday life between Mainland China and Hong Kong.

Hong Kong has long been suffering from an invasion of locusts. However, this does not regard

grasshoppers that damage crops. In Hong Kong, “smugglers” from Mainland China are called “locusts.”

These “smugglers” come from the mainland to Hong Kong and buy food products, such as powdered

milk and water, in large quantities and sell them in Mainland China for high prices. After these

smugglers leave the store, there are almost no products left, turning shelves into “fields damaged by a

group of locusts.” Thus, these people are called “locusts.” The author also often sees groups of smugglers

on trains to Shenzhen with carts full of purchased products. These people exist due to the gaps in prices

and quality between products in Mainland China and those in Hong Kong. In other words, there are

differences in everyday life between Mainland China and Hong Kong. For many products, it’s cheaper to

buy them in Hong Kong than in China, even when factoring in the travel costs between Mainland China

and Hong Kong. Thus, during long holidays in Mainland China, Chinese tourists fill Hong Kong,

purchasing luxury brand products as well as daily necessities such as powdered milk. Although such gaps

in everyday life create friction between Chinese tourists and the local residents in Hong Kong, such a

situation keeps the retail industry of Hong Kong superior, as an important factor, and this supports the

economy of Hong Kong. While market participants carefully observe the progress in monetary

deregulation, as has been seen in the free trade zone, it is also important to deregulate the retail industry

for the future of the Hong Kong economy.


April 30, 2014 46

Tomoko Washiashi, MHBK (China) Treasury Division

Chinese Yuan – May 2014


Foreign exchange market: Four major banks in China will strengthen their capital structure by issuing

preferred stocks by the end of the year.

- The PBOC (People’s Bank of China) central parity rate was set toward a weaker yuan, from the CNY

6.15 level to the CNY 6.16 level. On April 22, the PBOC central parity rate was set at CNY 6.1610,

which is the lowest yuan since September last year.

- In the onshore U.S. dollar/Chinese yuan exchange market, trading opened at the CNY 6.21 level. The

yuan appreciated at the beginning of the month, with U.S. dollar-selling and yuan-selling based on actual

demand, and the U.S. dollar/yuan exchange rate momentarily fell to the CNY 6.19 level. However, large

Chinese banks actively bought the U.S. dollar at around CNY 6.20 to the U.S. dollar, which limited the

appreciation of the yuan. The PBOC central parity rate was set toward a weaker yuan thereafter, leading

the actual trading rate to CNY 6.21 to the U.S. dollar. On April 7, however, an official of the U.S.

Department of the Treasury made a remark, “If the recent currency weakness signals a change in China's

foreign exchange policy, it would raise serious concerns.” In reaction to this, the yuan started

appreciating again. On April 9, the U.S. dollar/yuan exchange rate fell below CNY 6.20, and the yuan

continued appreciating to CNY 6.1860 to the U.S. dollar. Then, the March trade balance of China was

released with a surplus on April 10. However, the import and export figures were not improved in the

trade balance, and the March Producer Price Index that was released on April 11 was the lowest since

July 2013. As a result, the yuan depreciated to the CNY 6.21 level again.

In the Semiannual Report on International Economic and Exchange Rate Policies, released on April 15,

the U.S. Department of the Treasury maintained its view that “The Chinese yuan remains significantly

undervalued.” Furthermore, the January–March GDP of China recorded a growth rate lower than the

previous year. However, the reaction to these factors in the market was limited. The April HSBC

Manufacturing PMI of China (preliminary result) released on April 23 was as expected in the market,

although it fell below 50 for the fourth consecutive month. Under such circumstances, yuan-selling

dominated the market and the yuan depreciated to CNY 6.2466 to the U.S. dollar—the lowest since

December 2012.

- The offshore yuan exchange market remained almost at the same level as the onshore exchange

market. On April 23, the U.S. dollar/yuan exchange rate fell to the CNY 6.24 level, as was the case in the

onshore market, reaching the yuan’s low since February last year.

Interest rate market: Despite the fact that repo trading continued, the interest rates remained low.


April 30, 2014 47

- The market liquidity was relatively abundant, as a quarter ended in March in the capital market, and

the Chinese yuan interest rate market remained low. Although fund procurement pressure was expected

to increase at the beginning of the month in preparation for the first day of the reserve requirement period,

the PBOC supplied funds through its open market operations, keeping interest rates from rising. From the

middle of the month toward the end of the month, market liquidity remained abundant, and the PBOC

continued to absorb funds through repo trades. However, the interest rate market remained low, as there

were still multiple factors to keep interest rates low, such as the fund supply through the Treasury deposit

auctions as well as a decision to lower the deposit requirement ratio applied to banks in agricultural

village areas.

The SIBORs for different terms and the seven-day repo interest rate as of April 23 (closing rates) are

as follows.

O/N SHIBOR: 1.9630 (versus 2.8000 at the end of the previous month)

1M SHIBOR: 3.9511 (versus 4.6170 at the end of the previous month)



Seven-day repo interest rate (closing rate): 3.1000% (versus 4.1900% at the end of the previous

month)

16

16.5

17

17.5

6

6.05

6.1

6.15

6.2

6.25

6.3

14/01 14/02 14/03 14/04

（JPY)（CNY) USD/CNY CNY/JPY

2. Impact of the Major Indices on the Market Major economic indices

Economic indices Latest data Key points


April 30, 2014 48

GDP Growth Rate (First quarter in 2014)

+7.4% (YOY)

According to the announcement of the National Bureau of Statistics of China, the January–March GDP this year recorded YOY growth of 7.4%. This is below 7.5%, the annual growth rate set out by the government, and is the lowest level since the July–September period in 2012. The Chinese monetary authorities see this as a reasonable level, as it was above the market estimate, which was 7.3%. The Chinese monetary authorities also indicated that economic growth in China has still been facing downward risks, as the economy has not yet recovered both in China and abroad.

Manufacturing PMI (March)

50.3

According to the announcement of the National Bureau of Statistics of China, the March Manufacturing Purchasing Managers’ Index (PMI) of China was 50.3, exceeding both the previous month’s result (50.2) and the estimate (50.1). The index recorded positive growth from the previous month for the first time since November last year.

Trade Statistics (March) Total export value Total import value Trade balance

(YOY) –6.6 % –11.3 % +USD 7.7 billion

The March customs statistics were significantly weaker than expected, both interms of exports and imports. As a reason why the export value remained low, it can be pointed out that the figure declined in comparison to the inflated figures in the export statistics from the previous year. Exports for Hong Kong in March significantly declined by 43.6% year-on-year. As the same trend is likely to persist in April as well, the export statistics are also expected to weaken.

Price indices (March) CPI PPI

(YOY) +2.4% – 2.3%

According to the National Bureau of Statistics of China, the March Consumer Price Index (CPI) of China was up 2.4% YOY. On the other hand, the March Producer Price Index (PPI) of China was down 2.3% YOY, recording a YOYdecline for the 25th consecutive month. Even though CPI recorded positive growth compared to the previous month’s result, there is still no concern about inflation. The decline in PPI showed that the recovery in domestic demand has been gradual.


April 30, 2014 49

Money supply (March) M2

(YOY) +12.1%

The growth rate of M2 in March was 12.1% YOY, with a decline of 1.2% from the previous month. This growth rate is the lowest since 2001, falling below 13%, the target rate since April 2012, for the first time. The total social financing, which is an index to indicate economic liquidity, was CNY 2.07 trillion, more than twice as much as the February amount, which was CNY 938.7 billion. According to the data released by the People’s Bank of China, the figure increased rapidly after the consecutive holidays of the Chinese New Year in 2012 and 2013, as has been observed this time. The volume of new loans denominated in Chinese yuan was CNY 1.05 trillion (USD 168.8 billion) in March. This figure was almost the same as the market estimate, which was CNY 1 trillion. This figure was significantly higher than the previous month’s result, which was CNY 644.5 billion.


The yuan may appreciate in the near future. Expected Ranges Against the US$: CNY 6.1700–6.2800


Foreign exchange market: The downward pressure on the yuan may weaken.

The Chinese yuan fluctuation range was extended on March 17, 2014 for the first time in about two

years. Since the time of the previous widening of the yuan fluctuation range, this review has been

suggesting that for a country with an independent monetary policy such as China, capital transactions

would normally have to be liberalized out of necessity, once the foreign exchange system has become

more flexible. Therefore, it seems imperative for capital transactions to be deregulated in the times ahead

as a result of this widening of the fluctuation range. In April, a plan was announced to establish mutual

stock market access in Shanghai and Hong Kong, while overseas investment by Chinese companies has

been partly deregulated. Given such decisions, it can be said that the Chinese authorities have been

deregulating capital transactions along with reforms in the foreign exchange market. This remains a key

factor in the Chinese yuan exchange market in the times ahead.

According to the latest statistics on the net international investment position of China, the amount of

domestic direct investment has been significantly higher than that of foreign direct investment. If foreign


April 30, 2014 50

direct investment of Chinese companies increases as a result of the capital transaction deregulation, the

downward pressure on the yuan is likely to weaken in the times ahead.

Furthermore, looking at the latest yuan exchange market, the yuan has depreciated almost incessantly

to the level observed in December last year as of April 23. On the other hand, the Chinese government

announced, “the elasticity of the yuan exchange rate will be higher in both directions” and “the Chinese

monetary authorities will adjust or control the yuan exchange rate as is necessary when the yuan

exchange rate fluctuates in an extreme manner” at the time of the widening of the yuan fluctuation range

on March 17. Given such a statement, it can be understood that the Chinese monetary authorities do not

welcome the excessive depreciation of the yuan. Therefore, the yuan is unlikely to depreciate incessantly

in the times ahead, and the PBOC central parity rate is likely to be set at the current level around CNY

6.15–6.16 to the U.S. dollar. As of April 23, the yuan in the actual trading market has already been

weaker by around 1.3% compared to the PBOC central parity rate, and therefore, the downward pressure

on the yuan is likely to weaken toward the coming month.

Interest rate market: The interest rate market is expected to remain stable in May, as there is abundant

market liquidity.

The Chinese yuan interest rate market is expected to remain stable in May, as has been the case so far.

At the Monetary Policy Committee meeting at the People’s Bank of China, held this month, the

committee announced that “China will maintain its healthy monetary policy along with appropriate

growth in liquidity and credit.” In terms of monetary policy, the committee emphasized its “neutrality,”

and therefore, it is unlikely to take any measures of monetary easing or monetary tightening.

Corporate tax payments are expected to peak at the end of May, as was the case in April, which is

likely to strengthen the upward pressure in the interest rate market. However, it is unlikely for the interest

rates to appreciate sharply. Thus, the interest rate market is forecast to remain stable in May.

4. Topics Four major banks of China plan to issue preferred stock by the end of this year, in order to

strengthen their capital base.

Four major banks in China, including the Industrial and Commercial Bank of China, will issue preferred

stocks by the end of this year, in order to strengthen their capital base. While profit growth has been

slowing down, banks no longer have capacity to increase their own capital through internal reserves. The

Industrial and Commercial Bank of China, the China Construction Bank, the Agricultural Bank of China,

and the Bank of China announced, one after another, that they were preparing to issue preferred stocks.

The profits of these four banks increased by 12% year-on-year in 2013, while profits increased by 15%

year-on-year in 2012. As the Chinese monetary authorities approved the pilot issuance of preferred

stocks last month, banks will be able to strengthen their capital base while avoiding the issuance of


April 30, 2014 51

regular stocks, which would lead to market dilution. These preferred stocks can be converted to regular

stocks if the capital ratio falls below a certain level.

An authority of the U.S. Department of the Treasury warned China not to resume its control over

the yuan exchange market.

An authority of the U.S. Department of the Treasury warned China on April 7 that the Obama

administration would be extremely concerned if China fails to fulfil its public commitment to shift to the

foreign exchange system based on the market principle. China has accepted the depreciation of the yuan

prior to its widening of the yuan fluctuation range against the U.S. dollar on March 17. The U.S.

Department of the Treasury pointed out that this change is due to the fact that China continues to increase

its current account surplus with an excessive amount of foreign currency reserves, leading to a significant

capital inflow through foreign direct investment.

China announced a plan to establish mutual stock market access in Shanghai and Hong Kong,

according to the China Securities Regulatory Commission.

China plans to establish mutual stock market access in Shanghai and Hong Kong. Through this program,

investors will be able to buy and sell up to CNY 23.5 billion (roughly equivalent to JPY 385 billion).

Investors will be able to buy and sell stocks listed in the Hong Kong market up to CNY 10.5 billion

through the Shanghai market and stocks listed in the Shanghai market up to CNY 13 billion through the

Hong Kong market. This has been announced on April 10 by the China Securities Regulatory

Commission (CSRC) through a statement on its website. Chinese Premier Li Keqiang explained at the

annual general meeting of the Boao Forum for Asia, held in Boao, Hainan, prior to the announcement of

the quota that his program would lead to the further liberalization and healthy development of the capital

market both in Mainland China and Hong Kong.

The new calculation method for the capital-to-asset ratio of the Bank of China has been approved

by the China Banking Regulatory Commission.

The Bank of China, the fourth largest domestic bank in China, has gained approval by the China Banking

Regulatory Commission (CBRC) for a new calculation method for the capital-to-asset ratio that accords

with the international standard. The goal for the Chinese monetary authorities is to deregulate fund

procurement for the largest banks in China. According to the data released by the Bank of China on its

website on April 9, the bank is expected to be one of the first banks in China that comply with “Basel

III,” a global capital and liquidity guideline.

China deregulated overseas investment by raising the threshold for requiring an approval,

according to the ational Development and Reform Commission.

The National Development and Reform Commission (NDRC) has announced in a statement on its

website that, in China, overseas investment projects under USD 1 billion (roughly equivalent to JPY 100


April 30, 2014 52

billion) would no longer need approval if they are registered with the NDRC. (Before this announcement,

investment projects above USD 100 million [USD 300 million for resource development projects]

needed approval from the NDRC).

The People’s Bank of China submitted a deposit insurance scheme to the State Council, according

to DZH ews.

The People’s Bank of China (the central bank of China) submitted a plan to establish a deposit insurance

framework to the State Council and has been waiting for approval. According to a financial news

provider, DZH News, quoting multiple sources, the scheme may be announced during the April–June

quarter.

The U.S. Department of Treasury requested a greater role for the market in determining the yuan

exchange rate, while closely monitoring monetary policy in Japan.

The U.S. Department of Treasury requested that the market play a greater role in determining the yuan

exchange rate, with fewer interventions in the foreign exchange market. According to the Semiannual

Report on International Economic and Exchange Rate Policies, released on April 15, none of the major

trade partners for the U.S. were identified as a currency manipulator. In a statement released together

with the Semiannual Report on International Economic and Exchange Rate Policies, the U.S. Department

of the Treasury pointed out, “The recent widening of the yuan’s fluctuation band gives China an

opportunity to reduce intervention and allows the market to play a greater role in determining the

exchange rate.”

China lowers the deposit requirement ratio for some banks in agricultural village areas, according

to the State Council of the People’s Republic of China.

China is to lower the deposit requirement ratio applied for banks in agricultural village areas that fulfil

certain conditions, in order to increase fund supply to agricultural industries. This plan was announced by

the State Council on its website as a decision at an executive meeting held by the Chinese Premier Li

Keqiang on April 16.

Furthermore, the People’s Bank of China (PBOC) announced on its website that it would lower the

deposit requirement ratio for commercial banks in agricultural villages that are at the “prefectural level”

by two points, while lowering the deposit requirement rate for cooperative banks in agricultural villages

by 0.5 points.

The deposit requirement ratio has been lowered since April 25.

The State Administration of Foreign Exchange (SAFE) aims to prevent systemic regional financial

risks.


April 30, 2014 53

This year, the State Administration of Foreign Exchange (SAFE) will closely monitor cross-border

capital flow and will aim to prevent the impact of such in the market. SAFE announced the plan on its

website regarding a statement on a meeting held among 21 Chinese banks and 11 overseas banks.


April 30, 2014 54

Yasuhiro Nakamura, Sydney Branch

Australian Dollar – May 2014


The Australian dollar remained strong in April, thanks to the healthy figures in the March employment

statistics of Australia. However, the trend was reversed, and the Australian dollar weakened thereafter

due to the weaker-than-expected result of the January–March period Consumer Price Index (CPI) for

Australia.

The Australian dollar exchange market opened in April at the mid-USD 0.92 level and at the mid-JPY

95 level. The March Manufacturing PMI of China was announced, but the result was within the expected

range and therefore its impact on the Australian exchange market was limited. The Reserve Bank of

Australia (BRA) held a committee meeting thereafter and decided to maintain the existing policy interest

rate. The RBA indicated its view in the statement, “The decline in the exchange rate from its high a year

ago will assist in achieving balanced growth in the economy, but less so than previously as a result of the

rise over the past few months.” As the RBA expressed its concern over the negative economic impact of

the recent appreciation of the Australian dollar as a new issue, the Australian dollar depreciated after the

release of this statement. The New Zealand dollar was also sold intermittently, as the media reported that

the tsunami caused by the earthquake that hit the Chilean coast might cause some damage in New

Zealand as well. Then, the February retail sales figures of Australia were released on April 3, revealing a

decline in the department sector, and the overall result was an increase of 0.2% over the previous

month’s figure, which is slightly lower than the market estimate. As a result, the Australian dollar

remained weak, although its depreciation was also limited, thanks to the fact that the February trade

balance of Australia was released with figures stronger than the market estimate. On April 4, the March

employment statistics of the U.S., which had attracted much attention in the market, were released with

figures weaker than expected in the market. In reaction to this, the U.S. dollar was sold against other

major currencies, leading the Australian dollar to appreciate against the U.S. dollar, and the exchange

rate approached USD 0.93.

At the beginning of the following week, the Australian dollar continued appreciating to the mid-USD

0.93 level, as major global stock price indices remained strong, with speculators and investors buying

back the Australian dollar. Then, the March employment statistics of Australia were released on April 10

with better-than-expected results for the change in the number of employees and the unemployment ratio,

which encouraged market participants to buy the Australian dollar. As a result, the Australian dollar

appreciated further to reach the mid-USD 0.94 level. However, major stock price indices in the U.S.

declined after the sharp drop of high-technology-related stocks, also weakening major global stock price

indices. Following this trend, the Australian dollar weakened as well.


April 30, 2014 55

In the middle of the month, the minutes of the RBA meeting were released on April 15. However, the

contents were almost the same as the contents of the statement released on April 1. Thus, it did not

particularly surprise market participants, and fluctuations in the Australian dollar exchange market were

limited. Thereafter, the media reported that Ukraine would forcefully remove pro-Russian armed groups,

in reaction to which major European stock price indices declined. Following this trend, risk-averse

sentiment grew in the foreign exchange market as well, and the Australian dollar depreciated to the U.S.

dollar to the mid-USD 0.93 level. Then, the January–March period Consumer Price Index of New

Zealand was announced on April 16, and the result was lower than the market estimate. As a result, the

New Zealand dollar depreciated sharply, accelerating the depreciation of the Australian dollar as well.

On the other hand, major Chinese economic indices announced on the same day, including the

January–March GDP of China, were within the range expected in the market. However, as some market

participants had expected the figures to be worse than the market estimate, Australian dollar-buying

started to dominate the market gradually after the release of these indices. Furthermore, the media

reported that a major Japanese investment trust was considering raising their ratio of assets denominated

in the Australian dollar, which also supported the Australian dollar. Then, on April 17, the March number

of new vehicle sales in Australia and the January–March NAB Business Confidence Index were released,

revealing a slowdown from the previous result. Furthermore, U.S. dollar-buying occurred as a result of

healthy results in the number of new claims for unemployment benefits in the U.S., as well as because of

the info in the April Business Conditions Index released by the Federal Reserve Bank of Philadelphia.

Therefore, the Australian dollar depreciated against the U.S. dollar to the lower-USD 0.93 level. As the

market remained quiet thereafter because of the Easter holidays, the Australian dollar/U.S. dollar

exchange rate remained within a narrow range at the lower-USD 0.93 level.

On April 22 after the Easter holidays, Australian dollar-buying increased because of speculation and

actual demand, while market participants grew cautious about the announcement of the CPI, scheduled

for the following day. As a result, the Australian dollar appreciated to the upper-USD 0.93 level.

However, after attracting much attention, the CPI was up 2.9% year-on-year (whereas the market

estimate was up 3.2%), and the underlying inflation rate (the average of the CPI trimmed mean and the

CPI weighted median) was up 2.65% year-on-year (whereas the market estimate was up 2.9%)—both

falling below the expected levels. In reaction to this, the Australian dollar depreciated sharply to the USD

0.92 level.


April 30, 2014 56

87

89

91

93

95

97

0.86

0.88

0.9

0.92

0.94

0.96

14/01 14/02 14/03 14/04

（JPY)（USD) AUD/USD AUD/JPY


The Australian dollar may depreciate because of seasonal factors. Expected Ranges Against the US$: US$ 0.8850–0.9350


It is important to examine the seasonality in the Australian dollar exchange market when forecasting

the future trend. Figure 1 shows the annual trend in the Australian dollar/U.S. dollar exchange market for

each year since 2010. It should be pointed out that, as the grey frame indicates, the Australian dollar is

weaker than the previous month in May in all of the past four years. Let us then look at the Australian

dollar exchange market in May in each year. In 2010, the Australian dollar was rapidly sold in May,

following the sharp depreciation of the euro as a result of the growing concerns over the crisis in Greece,

resulting in a depreciation of 8.8% from the previous month. In 2011, the Australian dollar reached the

USD 1.10 level at the beginning of May for the first time since the introduction of the floating exchange

rate system, with growing expectations for an early interest rate hike by the RBA after the announcement

of the CPI of Australia at the end of April, which was higher than the market estimate. However,

risk-averse sentiment grew rapidly thereafter because of the confusion in the commodities market, after

the margin requirements for silver were raised by U.S. commodities exchanges, while the tension

regarding the European debt crisis was growing again, which caused the depreciation of the Australian

dollar. In 2012, the RBA announced its decision to lower the policy interest rate by 50 basis points,

exceeding the market estimate. This decision led market participants to expect Australian interest rates to

be higher in the times ahead, and the Australian dollar recorded a decline of 6.7% from the previous


April 30, 2014 57

month. In 2013, the RBA decided at its committee meeting to additionally cut the interest rate by 25 basis

points, while the majority of market participants had expected the policy interest rate to be maintained at

the existing level. As a result, the Australian dollar recorded a decline, as significant as in 2012, in May.

As has been shown above, there were always some events that could be a factor for the depreciation of

the Australian dollar in May of the past four years. In the U.S. stock market as well, there is a saying,

“Sell in May and go away,” indicating that May tends to see particular seasonal factors in the stock

market in the U.S. as well. The weakness of the U.S. stock market in May is also considered to be part of

the reason why the Australian dollar tends to depreciate in May. Furthermore, many hedge funds have

their account settlement in May, making significant adjustment to their portfolios, which has also been

said to be a seasonal factor in May. As a sudden risk event is also possible, it is difficult to predict what

would be a trigger to lead the Australian dollar to depreciate. However, there are some potential factors.

In the Australian dollar exchange market in 2012 and 2013, the depreciation of the Australian dollar

was triggered by the unexpected decision to cut the interest rate taken by the RBA Committee. This year,

it is difficult to expect that the RBA Committee would unexpectedly cut the interest rates in May. This is

because of the fact that, in the latest statement, the RBA indicated that the policy interest rate is likely to

be kept at the existing level for the time being, along with the fact that the CPI of Australia released in the

second half of April was not remarkable enough to encourage the RBA to cut the interest rate—with the

indices recently released (regarding personal consumption and the employment market) being relatively

strong.

With regard to the possibility of position adjustment, it is unlikely that the Australian dollar exchange

market would lead the position adjustment. The latest IMM currency futures data shows that there is no

particular imbalance in the speculative positions in the Australian dollar. On the contrary, the

accumulated short positions in the Australian dollar have just been cancelled, thanks to the recent

appreciation of said dollar. Furthermore, in terms of possible position adjustment in the stock market, it is

questionable whether further adjustment on stock positions is possible given the fact that the current

major stock price indices have declined to almost the same level observed at the beginning of the year.

Thus, would the economic indices of Australia released in May possibly be a factor to lead the

Australian dollar to depreciate? The below (at right) shows the Citi Economic Surprise Index for

Australia as calculated by Citigroup. The Citi Economic Surprise Index moves up when the actual results

in the economic indices are above the market estimate, while it moves down when they are below the

market estimate. Looking at the index level for the past four years, the index shows a negative figure for

April and May in the three years excluding 2013, indicating that many economic indices of Australia

were below the market estimate. The index has been nearly at its highest in the past four years at the

moment, reflecting the fact that many of the economic indices released in March and April were above

the market estimate. This has been a factor for the appreciation of the Australian dollar for the same

period, also demonstrating the optimism toward the Australian economy in the market. Thus, market

participants are growing more confident about the Australian economy. However, it is still possible that

the economic indices of Australia to be announced in the times ahead will be below the market estimate


April 30, 2014 58

(that the Citi Economic Surprise Index will be negative), given that upcoming economic indices are

unlikely to reflect the positive effect on the economy during the peak touristic season in summer, as

general personal and corporate sentiments are declining—as has been pointed out several times in past

reviews. Therefore, economic indices can be a trigger for the depreciation of the Australian dollar.

0.75

0.8

0.85

0.9

0.95

1

1.05

1.1

1.15

2013 2012 2011 2010 2014

-100

-80

-60

-40

-20

0

20

40

60

80

100

2010 2011 2012 2013 2014

Citi Economic Surprise Index

（資料）Citi groupGlobal Markets IncSource:


April 30, 2014 59

Hiroaki Nakano, Singapore Treasury Department

India Rupee – May 2014


In April, the U.S. dollar/Indian rupee exchange rate remained within a narrow range, mainly around

the lower-INR 60 level, after which rupee-selling increased slightly.

In her speech given on March 31, FRB Chair Janet Yellen exhibited a cautious attitude about the labor

market in the U.S. In reaction to this, the interest rates of short-to-medium term government bonds fell,

and market participants continued buying the rupee with a high interest rate. As U.S. dollar-selling

continued increasing, the U.S. dollar/rupee exchange rate fell to the mid-INR 59 level on April 2,

renewing its low for the first time in eight months. In the meantime, the stock market in India saw some

capital inflow, and the leading index, SENSEX, renewed its all-time high for eight consecutive business

days.

On the other hand, the central bank of India decided to keep the policy interest rate at 8% on April 1, as

had been expected in the market. As the two major indices, the Consumer Price Index and the Wholesale

Price Index, were on a decline, the governor of the central bank of India, Raghuram Rajan, indicated his

negative view about additional measures of further monetary tightening in the near future. Furthermore,

the March manufacturing PMI of India was released on the same day, and the result was below the

previous month’s figure (the result was 51.3, whereas the previous month’s result was 52.5). However,

the impact on the foreign exchange market was limited. Indian rupee-buying increased thereafter, led by

remarks made by U.S. officials as well as trends in the exchange markets in developed countries.

However, the March Service Industry PMI was released on April 3, and the result was lower than the

previous month’s figure (the result was 47.5, whereas the previous month’s result was 48.8), and ECB

Governor Mario Draghi implied potential measures of quantitative monetary easing in the euro zone,

which encouraged U.S. dollar-buying. As a result, the U.S. dollar/rupee exchange rate rose to the

lower-INR 60 level.

Then, the March employment statistics of the U.S. were released on April 4, with figures weaker than

the market estimate, which accelerated U.S. dollar-selling further in the following week. On April 7, the

U.S. dollar/rupee exchange rate fell below INR 60, although the exchange rate remained stable thereafter

at around INR 60 to the U.S. dollar. On April 11, the March trade statistics of India were released,

revealing a persistent decline not only in imports but also in exports. Furthermore, the March industrial

production of India was also announced on the same day, and the result was significantly below the

market estimate (the result was down 1.9% year-on-year, whereas the market estimate was down 0.9%

year-on-year), which kept the U.S. dollar/rupee exchange rate stable at the lower-INR 60 level.

On April 15, the March Wholesale Price Index of India (the result was up 5.70% year-on-year,


April 30, 2014 60

whereas the forecast was up 5.30% year-on-year) and the March Consumer Price Index of India (the

result was up 8.31% year-on-year, whereas the forecast was up 8.25% year-on-year) were released. Both

results exceeded the forecasted figures. In reaction to this, the U.S dollar/rupee exchange rate rose to the

mid-INR 60 level on April 17. The U.S. dollar/rupee exchange rate continued rising thereafter following

U.S. dollar-buying, despite the fact that SENSEX renewed its all-time high for three consecutive days.

As a result, the U.S. dollar/rupee exchange rate reached the 61.10 level on April 23. However, overseas

investors carried out a large amount of net buying of stocks on April 25, leading the U.S. dollar/rupee

exchange rate to fall sharply to the mid-INR 60 level for the first time in about a month. Capital inflows

into India continued with expectations for the outcome of the general elections in India for which voting

is currently taking place, as well as the change in the government that would follow. The U.S.

dollar/rupee pair has been trading at the mid-INR 60 level.

1.6

1.62

1.64

1.66

1.68

1.7

1.72

1.74

59.5

60

60.5

61

61.5

62

62.5

63

63.5

14/01 14/02 14/03 14/04

（JPY)（INR) USD/INR INR/JPY


Key factors include expectations for the outcome of the general election in India as well as improvements in fundamentals. Expected Ranges Against the US$: INR 59.00–62.00


The rupee exchange market is forecast to remain strong in May.

With regard to economic indices, there are signs that the Consumer Price Index and the Wholesale

Price Index, which used to be on a decline, are starting to rise again. Furthermore, exports continued to


April 30, 2014 61

decline, and the March trade balance saw a deficit of USD 10.5 billion. The amount of trade deficit

reached USD 10 billion for the first time in three months. Even though the governor of the central bank

of India, Raghuram Rajan, emphasizes that there is no immediate monetary tightening planned,

additional monetary tightening would be necessary before the end of the year in order to achieve the

target growth rate of 8.0% in the Consumer Price Index by January 2015 and 6.0% by January 2016. The

Indian government also indicated at the end of the previous month that it had a plan to consider

deregulation on gold imports, in which case the current account deficit may grow again. Under such

circumstances, the Indian rupee is expected to remain weak in the times ahead.

However, the rupee exchange market and the stock market in India have not been depreciating sharply

despite the deteriorating indices discussed above. This is thanks to expectations for the victory of the

Indian People’s Party (BJP) led by Narendra Modi at the general election in India for which voting is

currently taking place. In the past, Narendra Modi led high economic growth as the chief minister of

Gujarat State and is therefore expected to successfully carry out deregulation if elected.

According to a public opinion poll carried out immediately before the voting by a television company

in New Delhi (NDTV), as well as according to a poll by Hansa Research, the National Democratic

Alliance (NDA), an alliance of multiple political parties led by the BJP, is likely to win the majority

votes. If the result is as expected, economic reforms after the change of government are expected to go

relatively smoothly, increasing capital inflow into India again.

However, in the opinion poll, the expected number of seats in parliament for the NDA was just above

half, and thus the result of the election remains uncertain. If the NDA wins the majority as a coalition

government, it is possible for regulatory reforms to be slow, with few political parties with the casting

vote taking control.

Furthermore, the manifesto of the BJP released on April 7 indicates that the government would not

allow foreign companies to enter the industry of general merchandise stores (merchandise stores dealing

with multiple brands, such as supermarkets). Thus, some express serious concerns over the populism.

The result of the general election of India is due to be out on May 16, and therefore the Indian rupee is

expected to remain stable until then. It is likely that the Indian rupee exchange market as well as the stock

market in India will strengthen significantly thereafter in the celebratory mood in the market. However, it

is unlikely for the rupee to continue appreciating, as the external environment remains uncertain, with the

high inflation rate, consistent current account deficit, and slow economic recovery in developed

countries.

This report is intended only to provide information and does not constitute an inducement to engage in any particular investment. This report is based on information believed to be reliable, but Mizuho Bank, Ltd. (MHBK) does not warrant its accuracy or reliability. The contents of this report may be subject to change without notice. Final investment decisions should be made based on your own judgment. Furthermore, this report’s copyright belongs to MHBK and this report may not be cited or reproduced without the consent of MHBK, regardless of the purpose.

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