usd strength hits a roadblock - dbs bank usd strength hits a roadblock 3 february 2017 1 ... but...

USD strength hits a roadblock 3 February 2017

1

USD strength hits a roadblockDBS Group Research 3 February 2017

Mid-quarter FX update

Philip Wee • (65) 6878-4033 • [email protected]

Asia Fundamentals favor USD as the strongest G3 currency

But Trump’s protectionist language is holding it back

USD may correct further before appreciating again

CNY Moving with DXY

HKD Monitoring liquidity

TWD Upside surprise

KRW Downgraded

SGD Neutral policy remains

MYR Vigilant against speculation

THB Broad-based recovery

IDR Rating upgrade looms

PHP Debt rating warning

VND Stable

INR Resilient

USD Fed hikes vs protectionism

JPY Hopeful

EUR QE stays

GBP Article 50 looms

AUD Slow and patient

Refer to important disclosures at the end of this report

AUDNZDJPYCADGBPEURUSDBRLRUBZARCNYINR

KRWTWDSGDTHBMYR

5.2 5.0

3.3 3.02.6 2.4

-2.5

4.1

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PHP

Profit-taking in the USD in early 2017 after strong Trump rally in Nov-Dec 2016

% change vs USD,

1 Feb 2017 vs 31 Dec 2016

MAJOR CURRENCIES EMERGING ASIAN CURRENCIESB R I C S

* USD is performance of DXY index


2

Currency forecasts

1-Feb 1Q17 2Q17 3Q17 4Q17

EUR /usd 1.0758 1.08 1.08 1.07 1.07Consensus 1.04 1.03 1.05 1.05

Forwards 1.08 1.08 1.09 1.10

usd/ JPY 113.23 111 113 114 116Consensus 115 118 118 117

Forwards 113 112 112 111

usd/ CNY 6.8706 6.93 7.02 7.11 7.19Consensus 7.00 7.09 7.13 7.16

NDF 6.91 6.99 7.05 7.11

usd/ HKD 7.7597 7.78 7.78 7.78 7.78Consensus 7.76 7.76 7.76 7.76

Forwards 7.75 7.75 7.75 7.75

usd/ TWD 31.079 32.2 32.4 32.5 32.7Consensus 32.5 32.8 32.9 33.0

NDF 31.1 31.0 30.9 30.8

usd/ KRW 1143 1199 1201 1204 1206Consensus 1200 1211 1220 1220

NDF 1153 1152 1150 1148

usd/ SGD 1.4108 1.44 1.45 1.46 1.48Consensus 1.45 1.47 1.47 1.47

Forwards 1.41 1.41 1.41 1.41

usd/ MYR 4.4220 4.46 4.56 4.67 4.78Consensus 4.50 4.55 4.52 4.54

NDF 4.43 4.45 4.48 4.50

usd/ THB 35.049 36.3 36.5 36.6 36.8Consensus 36.0 36.2 36.3 36.4

Off fwd 35.1 35.1 35.1 35.2

usd/ IDR 13350 13339 13518 13697 13876Consensus 13600 13740 13800 13826

NDF 13466 13640 13816 14022

usd/ PHP 49.759 49.8 50.2 50.7 51.1Consensus 50.2 50.6 50.8 50.5

NDF 49.6 50.1 50.4 50.6

usd/ INR 67.370 69.6 70.5 71.4 72.4Consensus 68.5 68.9 69.0 69.0

NDF 67.7 68.5 69.2 69.9

usd/ VND 22640 22782 22782 22782 22782Consensus 22882 23000 23000 23200

Forwards 22720 22856 23004 23185

AUD /usd 0.7655 0.71 0.70 0.70 0.69Consensus 0.73 0.72 0.72 0.72

Forwards 0.76 0.76 0.75 0.75

GBP /usd 1.2520 1.23 1.20 1.17 1.14Consensus 1.21 1.21 1.22 1.23

Forwards 1.27 1.27 1.27 1.28

DBS forecasts in red. Consensus and forwards from Bloomberg as at 1 Feb 2017


3

Fed hike expectations vs Trump protectionism fears

Our view has not changed. We consider the USD’s depreciation since the start of 2017 a correction from the (perhaps overly-strong) Trump rally in Nov-Dec 2016. The USD will eventually resume its appreciation when the Fed steps up th epace of rate hikes this year. Previously it hiked once in in 2015 and once in 2016. The Fed’s dot plot continues to paint a monetary policy normalization process that extends into 2019.

We expect four Fed hikes this year. Officials signalled three rate increases for 2017 at the FOMC meeting in Dec 2016. It also kept the door open for more hikes if President Donald Trump delivers on his pledge to boost the US economy with tax cuts, more fiscal spending and deregulation. Close attention will be paid to Trump’s budget proposals scheduled for 6 Feb. The Fed reckons that for every increase in fiscal spending by 1% of GDP, rates can rise by an additional 50bps.

The importance of Fed hikes to the USD’s outlook is best reflected by the high correlations that EUR/USD and USD/JPY have with their respective 10Y bond yield spreads against their US counterpart.

Latest

1-Jun-162-Jun-163-Jun-166-Jun-167-Jun-168-Jun-169-Jun-16


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Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17

Lower EUR/USD needs more Fed hikes, steady ECB

% pa ↑ stronger EUR

EUR/USD(right)

EU-US 10Y bond spread(left)

US presidentialelection

Trump'sinauguration

Latest



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Higher USD/JPY needs more Fed hikes, steady BOJ

% pa ↑ stronger USD

USD/JPY(right)

US-JP 10Y bond spread(left)

Trump'sinauguration


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X-axis: number of months from 1st hike

Fed's rate hike cycle is gradual vs past experiences

Fed Funds Rate, % pa

1999-00

1994-95

2015-19

2004-06

Jan-07Feb-07Mar-07Apr-07

May-07Jun-07Jul-07

Aug-07Sep-07Oct-07Nov-07Dec-07Jan-08Feb-08Mar-08Apr-08

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Fed believes it is time to start normalizing rates

% YoY

Ave hourly earnings

CPI inflation

Core CPI

Fed's 2-2.5% inflation target


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Latest



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EU stocks came up from behind US equities

Indexed: 8 Nov 2016=100 ↑ stronger EUR

EUR/USD(right)

S&P500(left)


MSCI Euro(left)

Trump'sinauguration

Latest



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Nikkei 225 rise and fell with USD/JPY

Indexed: 8 Nov 2016=100 ↑ stronger USD

USD/JPY(right)

S&P500(left)


Nikkei 225(left)

Trump'sinauguration

Even so, two hurdles have emerged to challenge USD bulls in early 2017.

First, the global recovery turned out to be broader-than-expected. As the growth/inflation outlook improved in Europe and Japan, their eq-uity markets started to play catch up with the US. EUR/USD regained its composure and recovered when EU equities overtook their US peers on an indexed basis. Japanese stocks, on the other hand, are still linked to Abenomics and needed a weaker JPY to keep rising. While encouraged by the better outlook, central banks in the Eurozone and Japan did not to abandon their loose monetary policy stance.

Second, while fundamentals favored the greenback on a relative basis, USD bulls ran up against a wall of trade protectionism from the Trump administration. Soon after his inauguration, Trump cancelled the Trans-Pacific Partnership (TPP) in Asia, sought to renegotiate the North Amer-ican Free Trade Agreement (NAFTA) and was last looking to scrap the Transatlantic Trade and Investment Partnership (TTIP) with Europe. Trump cheered Brexit which reflected his administration’s preference for bilat-eral trade deals that favor the US.

Key events in 1H 2017

Date Event

Feb 6 President Trump presents budget proposalsFeb 12 German presidential electionFeb 15 Fed Chair Yellen's congressional testimonies

Mar 15 FOMC meetingMar 15 Netherlands general electionMar 31 Article 50 & Brexit

Apr mid US Treasury Department Currency ReportApr 23 French presidential elections

May 26 G7 Summit

Jun 11 French legislative electionsJun 14 FOMC meeting

Latest

1-Sep-162-Sep-165-Sep-166-Sep-167-Sep-168-Sep-169-Sep-16

12-Sep-1613-Sep-1614-Sep-1615-Sep-1616-Sep-1619-Sep-1620-Sep-16

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Fed hikes vs Trump's protectionism

DXY Index

Trump winsUS elections

Fed hike

Fed signals Dec hike

Trump'sinauguration

Cancelled TTP & TTIP

Renegotiate NAFTA

Mexico wall

FX manipulation:CNY, JPY, EUR

USD excessively strong


5

Latest

4-Jan-165-Jan-166-Jan-167-Jan-168-Jan-16

11-Jan-1612-Jan-1613-Jan-1614-Jan-1615-Jan-1618-Jan-1619-Jan-1620-Jan-1621-Jan-16

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90919293949596979899

100101102103104

Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

USD/CNY tightened its correlation with DXY Index

DXY (USD) Index USD/CNY

The risk of America labelling more countries, not just China, as currency manipulators is no longer negligible. The Trump administration criticized China, Japan and Germany for unfair trade advantages via weaker ex-change rates from their loose monetary policies. US relations with Mexico have also deteriorated over the wall that Trump has pledged to build at the border. These four countries have one thing in common – America’s top four bilateral trade deficits are with them.

Hence, the Trump administration is unlikely to tolerate a stronger USD ahead of the US Treasury Department Currency Report scheduled for mid-April. Japanese corporates see US’s protectionist stance limiting USD/JPY’s upside to 120-125. Eurozone is, meanwhile, vigilant against key elections in the Netherlands, France and Germany leading to more Euroscepticism. The last thing the EU needed was Trump’s complaint against the EUR’s undervaluation adding to break-up risks.

With its key components (EUR and JPY) reluctant to depreciate sharply, it will be hard for the DXY to rally strongly. Given its tightened relationship with the DXY, USD/CNY is unlikely to rise above 7.00 anytime soon either.

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Real effective exchange rate of EUR

Base year 2010=100

+2 std dev

-2 std dev

Ave

-1 std dev

+1 std dev

REER EUR

REER is from Bank of International Settlements

IE: Ireland

DE: Germany

KR: S Korea

JP: Japan

IT: Italy

CN: China

MY: Malaysia

VN: Vietnam

IN: India

MX: Mexico

Legend

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IE DE KR JP IT CN MY VN IN MX

Current account balances

Actual & projected 2016 balances, % of GDP

3% of GDP criteria to qualify as acurrency manipulator

CN: China

JP: Japan

GE: Germany

MX: Mexico

IE: Ireland

VN: Vietnam

KR: S Korea

IT: Italy

IN: India

MY: Malaysia

Legend

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America's top 10 bilateral trade deficits

Jan-Nov16 total, USD bn

USD 20bn criteria to qualify as currency manipulator


6

AXJ currencies after the US presidential elections

Overall, Asia ex Japan (AXJ) currencies weathered the post-US election headwinds from the global USD fairly well. The DXY Index is our refer-ence for the global USD below.

Currencies of high growth economies – PHP, IDR, VND and INR – were notably resilient when DXY rallied strongly in Nov-Dec 2016. They were, however, less willing to appreciate when DXY retreated in early 2017. These are pro-investment Asian countries that promote policies to en-hance the attractiveness of their domestic-led economies. Indonesia is a good example where we expect a debt rating upgrade. The one excep-tion is the Philippines where risks to its debt rating have surfaced.

KRW and MYR were the most volatile AXJ currencies with performances matching the DXY. Both KRW and MYR fell most in the region when DXY was strong, and recovered very differently when DXY was weak. The KRW recouped most of its losses while the MYR held on to most of them. While Malaysia has been vigilant against speculation against its currency, Korea is worried that America may name it a currency manipulator.

TWD and the THB stood out as the only currencies that appreciated back to pre-election levels. Taiwan was the only Asian country that experienced a recession, and is currently benefitting from the cyclical global export re-covery. Thailand is also expecting a broad-based recovery. Both countries have strong international liquidity positions.

Even so, there is little room for complacency. Financial markets have been fairly sanguine about the Trump between his election victory and his in-auguration, keeping focus on his policies to stimulate the US economy. The rotation out of bonds into equities reflected optimism in America emerging from its crisis, and the Fed moving towards normalize monetary policy in a meaningful way.

This optimism is predicated on the market’s assumption that Trump’s pro-tectionist ways would only increase trade tensions and not lead to trade wars. Unfortunately, markets have not drawn comfort from the cancel-lation of trade pacts and accusations of currency manipulations after Trump’s inauguration. Markets are no longer sure if Trump would not name China a currency manipulator and spark a trade war.

DXYEURJPYGBPAUDCNYTWDKRWSGDMYRTHB

CNY TWD

KRW

SGD

MYR

THB

IDRPHPVND

INR

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Asia ex Japan currencies since US presidential election

Y-axis: sensitivity to DXY Index

X-axis: std dev

MYRPHPIDR

DXYCNYSGDVNDINR

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TWD

KRWSGD

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MYR PHP IDR DXY CNY SGD VND INR KRW THB TWD

USD vs AXJ currencies since US presidential elections

% ch in USD vs AXJ, 2 Feb 2017 vs 8 Nov 2016↑ stronger USD

Sources:

All data are sourced from CEIC, Bloomberg, Reuters and government agen-cies.

Transformations and fore-casts are from DBS Group Research and Bloomberg consensus


7

US dollar

USD’s uptrend is still intact, underpinned by expecta-tions of Fed hikes and fiscal stimulus

• The DXY (USD) Index broke above its two-yearrange between 93 and 100 during the Trump rally in Nov-Dec 2016. The subsequent fall from its high of 103 to below 100 in early 2017 was triggered by protectionism worries after his inauguration.

• Yet,thisisstillconsideredacorrectionintheUSD’smedium-term uptrend. While growth and inflation also improved in the Eurozone, UK and Japan, their central banks have resisted calls to roll back their loose monetary policies. None of them intend to join the Fed in hiking rates this year.

• TheUSD’s continued rally hinges strongly on theFed moving from “one hike a year” in 2015-16 to more hikes in 2017. The Fed’s projection for three hikes this year did not factor in Trump’s policies. The Fed reckoned that if fiscal spending increased by 1% of GDP, rates could rise by another 50bps. US President Donald Trump is scheduled to present his budget proposals on the first Monday of Feb.

• Thereisonemainrisktothisoutlook.Trump’spro-tectionist policies must not escalate trade tensions into trade wars.

Japanese yen

USD/JPY has retreated from the top of our projected trading band after a strong rally in Nov-Dec

• Japanwasamajorbeneficiaryof theTrumprallyin Nov-Dec 2016. USD/JPY surged 17.3% within a short span of six weeks, from its 101.15 low on 9 Nov to a high of 118.66 on 15 Dec. The weak JPY propelled the Nikkei 225 higher by more than 20% during the comparable period.

• The 10Y Japanese Government Bond (JGB) yieldturned positive from mid-Nov after staying below 0% for 8-9 months. While many attributed this to the Trump rally lifting global bond yields, note that Japan’s headline inflation has also returned to posi-tive territory since Oct16.

• This,however,doesnotimplythattheBankofJa-pan (BOJ) is about to declare victory on achieving its goal to return inflation to 2%. Core inflation, which excludes food and energy, has remained subdued at 0-0.2% since Aug16. According to a Re-uters polls in January, nearly two-thirds of Japan’s corporates do not intend to raise wages this year.

• Finally, Japan Inc believes that USD/JPY’s upsidewill be limited to 120-125 after US President Don-ald Trump threatened to slap tariffs on Toyota cars built in Mexico.

1-Feb 1Q17 2Q17 3Q17 4Q17

DBS 99.64 98.9 99.4 99.8 100.2Consensus 100.2 103.1 103.9 102.8

Projected trading bandCeiling 103.75 103.8 104.2 104.6 105.0Floor 94.147 94.1 94.6 95.0 95.4Slope 1.7% depreciation a year for USDWidth 5.1% around mid

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DXY (USD) Index – flatter climb

BOJ QQE1

BOJ QQE2

ECB QECNY deval

Fedhikes

Fed

Brexit

DBSfConsensus

Trumpvictory

Projected trading range

1-Feb 1Q17 2Q17 3Q17 4Q17

DBS 113.23 111 113 114 116Consensus 115 118 118 117

Projected trading bandCeiling 118.69 118 120 121 122Floor 102.31 103 105 106 107Slope 5.0% depreciation a year for JPYWidth 7.8% around mid

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USD/JPY – correcting from top of rising channel

Trumpvictory

Fed taper

BOJ QQE2

BOJ QQE1

ECB QE

CNY devalFed hikes

Brexit

DBSfConsensus



8

Euro

EUR/USD to eventually reflect a better US outlook vs the Eurozone

• EUR/USDisexpectedtoeventuallytradebelowitstwo-year range between 1.05 and 1.15. We expect the Fed to deliver four rate hikes this year, which will be a significant departure from its “one hike per year” pace seen in 2015 and 2016. The Euro-pean Central Bank (ECB), on the other hand, will keep its quantitative easing (QE) program running till the end of 2017.

• EUR/USDrecoveredsomeofitspost-TrumplossesinJanuary as the growth/inflation outlook in the Eu-rozone also improved. Germany, where inflation is higher than the bloc, has started to call on the Eu-ropean Central Bank (ECB) to roll back on its loose monetary policy.

• TheECBisunlikelytodeviatefromitsplantokeepits quantitative easing (QE) program running till end-2017. It has dismissed the recent rise in head-line inflation as supply-led, driven mostly by oil prices. Underlying core inflation has remained sub-dued at/below 1% YoY since 4Q13. On the econo-my, the ECB remains vigilant against political risks, from Brexit to the elections in Europe this year, as well as protectionist policies coming out of the US.

British pound

GBP/USD remains a “buy the rumour, sell the fact” on the UK eventually triggering Article 50

• GBP/USDhasbeenstablewithin1.20-1.28aftertheflash crash on 7 Oct. The underlying bearish bias for GBP is, however, intact and subtly reflected by the “lower highs” and “lower lows” of the range.

• Theups anddownswithin this boundary echoedthe market’s hopes for UK to avoid leaving the Eu-ropean Union (EU) and its fears for a hard Brexit. The swings also reflected the struggle to balance the upside surprises in post-referendum UK data and the potential medium-term drag on the econ-omy from corporates and banks leaving the UK.

• TheUKSupremeCourt’srulingon24Janforpar-liament to vote on Article 50 is not expected to prevent Brexit from happening. Parliament could, however, table amendments and push out PM May’s deadline to trigger Article 50 by end-March.

• As with many major currencies, Brexit may be a“buy the rumour, sell the fact” play for GBP. The market is likely to resume selling GBP when it sees the UK government moving closer towards trig-gering Article 50. Once invoked, GBP/USD is likely to follow-through with another sell-off before it starts to stabilize and consolidate into a range.

1-Feb 1Q17 2Q17 3Q17 4Q17

DBS 1.0767 1.08 1.08 1.07 1.07Consensus 1.04 1.03 1.05 1.05

Projected trading bandCeiling 1.1401 1.14 1.14 1.13 1.13Floor 1.0205 1.02 1.02 1.01 1.01Slope -1.3% depreciation a year for EURWidth 5.9% around mid

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EUR/USD – wide range with gradual downside bias

BOJ QQE1

BOJ QQE2

ECB QE

CNY deval Fed hike

Fedtaper

Brexit

DBSfConsensus

Projected trading range Trump

victory

1-Feb 1Q17 2Q17 3Q17 4Q17

DBS 1.2652 1.23 1.20 1.17 1.14Consensus 1.21 1.21 1.22 1.23

Projected trading bandCeiling 1.3301 1.31 1.28 1.25 1.22Floor 1.1571 1.14 1.11 1.08 1.05Slope -9.0% depreciation a year for GBPWidth 7.9% around mid

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GBP/USD – bumpy road towards Article 50

BOJ QQE1

BOJ QQE2

ECB QE

CNY deval Fed

hike

Fedtaper

Brexit

DBSfConsensus


Trumpvictory

Fed


9

Chinese yuan

USD/CNY has been fluctuating with the global USD since Aug 2016

• USD/CNYpeakedat6.9628on3Jan,whichwasitshighest close since May 2008, before it corrected to the mid-point of our projected trading range.

• To counter CNYdepreciation pressures fromout-flows at the start of the year, China restricted cross border lending and transfer of funds by banks and corporates, limited the size and nature of foreign direct investment by Chinese companies and re-stricted the usage of USD by Chinese individuals.

• ApartfromtheabovemeasurestodiscourageCNYdepreciation, the fall in USD/CNY was also in line with the retreat in the DXY (USD) Index in January. In fact, USD/CNY has been highly correlated with the DXY since Aug 2016. Hence, USD/CNY is still likely to trend higher with the global USD on the Fed hikes coming this year.

• AsforUSPresidentDonaldTrump’sthreattolabelChina a currency manipulator, this is unlikely to ma-terialize in the next US Treasury Department (USTD) currency report scheduled for mid-April. China cur-rently fulfills only one of the three measures on manipulation. The USTD will need to amend the criteria before it can label China.

Hong Kong dollar

USD/HKD may lift off the floor of its 7.75-7.85 band on more than one US rate hike this year

• Theyear2017startedwiththesamescareovertheweak CNY the same month a year ago. The over-night CNH Hibor spiked to 60% and revisited the highs seen in Jan 2016. China was also reining in the CNY’s depreciation then.

• The panic was, however, considerably less com-pared to last year. USD/HKD did not spike above the mid-point of its 7.75-7.85 convertibility band. USD/CNH also traded at a discount and not a pre-mium to USD/CNY.

• Nonetheless,theweakCNYoutlookhasshrunktheCNY deposits in Hong Kong by CNY 304bn to CNY 547bn in 2016. This was twice the CNY 152bn fall seen in 2015.

• TheHongKongMonetaryAuthority (HKMA) hassingled liquidity as its top worry in 2017. Expecta-tion for the Fed to step up the pace of rate hikes this year could result in a more volatile invest-ment environment. HKMA has already warned the government to expect lesser returns from the Exchange Fund. Hence, the scope for USD/HKD to deviate from the floor of its convertibility can no longer be discounted.

26-Jan 1Q17 2Q17 3Q17 4Q17

DBS 6.8807 6.93 7.02 7.11 7.19Consensus 7.00 7.10 7.13 7.15

Projected trading bandCeiling 6.9933 7.06 7.15 7.23 7.32Floor 6.7350 6.80 6.89 6.98 7.07Slope 5.1% depreciation a year for CNYWidth 1.9% around mid

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USD/CNY – projected trading band intact

BOJ QQE1

BOJ QQE2

ECB QE

CNY deval

Fed taper

BrexitDBSfConsensus


Trump victory

Fed hike

1-Feb 1Q17 2Q17 3Q17 4Q17

DBS 7.7596 7.78 7.78 7.78 7.78Consensus 7.76 7.76 7.76 7.76

Projected trading bandCeiling 7.8000 7.80 7.80 7.80 7.80Floor 7.7500 7.75 7.75 7.75 7.75Slope 0.0% depreciation a year for HKDWidth 0.3% around mid

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USD/HKD – off the low of its convertibility band

BOJ QQE1

BOJ QQE2

ECB QE

CNY deval

Fedhike

Fedtaper

US losesAAA

Brexit

DBSfConsensus


Trump


10

Taiwan dollar

Taiwan’s improving cyclical fundamentals are keeping USD/TWD in the lower half of its rising price channel

• USD/TWDwastheonlynon-peggedAsiaexJapanexchange rate that stayed mostly within the low-est quartile of its ascending price channel during the Nov-Dec Trump rally. This was attributed to an export-led turnaround in the economy in 2H16.

• Expectations for the central bank (CBC) to lowerrates have evaporated. Real GDP growth turned positive in 2Q16 after three consecutive quarters of negative growth. Since then, growth picked up to 2.58% YoY in 4Q16 on the back of robust exports.

• That said, the CBC is unlikely to follow US rateshigher either. Monetary policy will remain accom-modative to augment the government’s stimulus to boost domestic demand. We expect GDP growth to improve to 2.1% in 2017 from 1.4% last year.

• Untilthen,theCBCisnottooconcernedaboutCPIinflation which has remained below 2% YoY since Apr16. We see inflation averaging 1% this year.

• Overall,USD/TWDwillfirmthisyearfromFedhikes(we see four increases this year) and rate inaction by the CBC, but the rise will be tempered by a broader recovery in the Taiwan economy.

Korean won

Fed hike expectations to keep USD/KRW firm in the upper half of its ascending price channel

• KoreaiswarythataFedhikeinMarchmayincreasecurrency volatility. Since Sep 2016, when the Fed started to prepare global markets for a hike last Dec, the correlation between USD/KRW and the DXY (USD) Index has tightened considerably.

• KoreaisnotexpectedtofollowAmericainraisingrates this year. The Bank of Korea (BOK), on 13 Jan, downgraded its 2017 growth outlook to 2.5% from the 2.8% it forecast in Oct 2016. The new forecast is further below the 3% potential growth rate it projected in 2015.

• TheBOKhasabandonedits2.5-3.5%targetbandfor CPI inflation in favour of a 2% target from 2016 to 2018. The decision was probably attributed to the fact that CPI inflation has remained below 2% YoY since Nov12. We expect inflation to average 1.6% in 2017 from 1.3% last year.

• SpeculationhasemergedfortheUStonameKoreaa currency manipulator. The US Treasury Depart-ment will need to modify the criteria of its monitor list for this to happen. Korea currently fulfills only two out of the three criteria that would tag it a manipulator.

1-Feb 1Q17 2Q17 3Q17 4Q17

DBS 31.274 32.2 32.4 32.5 32.7Consensus 32.5 32.8 32.9 33.0

Projected trading bandCeiling 32.850 32.9 33.1 33.3 33.4Floor 31.347 31.4 31.6 31.8 31.9Slope 1.9% depreciation a year for TWDWidth 2.4% around mid

28

29

30

31

32

33

34

35

28

29

30

31

32

33

34

35

13 14 15 16 17

USD/TWD – testing bottom of channel

Fed taper

BOJ QQE2

BOJQQE1

ECB QE

CNY deval

Fed hike

Brexit


DBSfConsensus

Trumpvictory

1-Feb 1Q17 2Q17 3Q17 4Q17

DBS 1153 1199 1201 1204 1206Consensus 1200 1211 1220 1220

Projected trading bandCeiling 1251 1253 1255 1258 1260Floor 1143 1145 1147 1149 1152Slope 0.8% depreciation a year for KRWWidth 4.7% around mid

1000

1050

1100

1150

1200

1250

1000

1050

1100

1150

1200

1250

11 12 13 14 15 16 17

USD/KRW – returned into upper half of channel

US losesAAA

Fedtaper

BOJQQE2

BOJQQE1

ECB QE

CNY deval

Fedhike

Brexit

DBSfConsensus


Trumpvictory


11

Singapore dollar

USD/SGD’s uptrend remains intact within our project-ed trading band

• The SGD nominal effective exchange rate (NEER)policy shifted to a neutral stance in Apr 2016. The Monetary Authority of Singapore (MAS) is unlikely to return to a modest and gradual appreciation policy at its next policy review in Apr 2017.

• Lookingback, theneutralpolicy lastedabout1.5years to help the Singapore economy recover from the 1997/98 Asian currency crisis and the 2008/09 global financial crisis. The zero appreciation policy was in place for almost 3 years during/after the 2000/01 global tech recession.

• CPIinflationwas1.2%YoY,1.5%and3.2%whenthe appreciation policy returned in Jul 2000, Apr 2004 and Apr 2010 respectively. Although inflation turned positive at 0.2% YoY in Dec16 for the first time in two years, it is still below the official 0.5-1.5% target range for 2017.

• RealGDPgrowthwasmorethan8%YoYanddou-ble-digit expansions were seen in non-oil domestic exports when the neutral stance was abandoned. Retrenchments also came off their peaks. All these factors have yet to come together.

Malaysian ringgit

USD/MYR at record high again, with global USD re-maining strong on Fed hike hopes

• USD/MYR started 2017on a highnote. Thepeakof 4.4980 on 4 Jan surpassed the 4.4770 level seen during the emerging market volatility in Sep 2015. This, however, did not imply that the MYR was weak on domestic fundamentals. Unlike 2014-15, the Kuala Lumpur Composite Index (KLCI) is not falling sharply today from a slowing economy.

• Infact,weexpectMalaysia’sgrowthtoimproveto4.5% in 2017 from 4.2% in 2016 after two years of slowdown. The better outlook is reflected more in the KLCI than the MYR. Like Nov-Dec 2016, Trump’s stimulus plans and Fed hikes are expected to keep the USD strong globally this year.

• AgainstthisbullishUSDbackdrop,BankNegaraMa-laysia (BNM) will be vigilant against currency specu-lation this year. According to the Foreign Exchange Administration (FEA) rules, any offshore trading of MYR such as the non-deliverable forward (NDF) is not recognized. One thing needs to be clear. BNM is not targeting an exchange rate level but simply looking to prevent excessive volatility from hurt-ing the recovery. It has assured real investors that liquidity will stay ample in the financial system.

1-Feb 1Q17 2Q17 3Q17 4Q17

DBS 1.4123 1.44 1.45 1.46 1.48Consensus 1.45 1.47 1.47 1.47

Projected trading bandCeiling 1.4645 1.47 1.48 1.50 1.51Floor 1.3960 1.40 1.42 1.43 1.44Slope 3.4% depreciation a year for SGDWidth 2.4% around mid

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

14 15 16 17

USD/SGD – correcting down after Trump rally

BOJ QQE2

ECB QE

CNY deval

Fedhike

Trumpvictory

DBSfConsensus


Brexit

NeutralSGD

1-Feb 1Q17 2Q17 3Q17 4Q17

DBS 4.4280 4.46 4.56 4.67 4.78Consensus 4.50 4.55 4.52 4.54

Projected trading bandCeiling 4.6032 4.67 4.78 4.88 4.99Floor 4.1790 4.25 4.35 4.46 4.56Slope 9.2% depreciation a year for MYRWidth 4.8% around mid

2.80

3.00

3.20

3.40

3.60

3.80

4.00

4.20

4.40

4.60

4.80

5.00

2.80

3.00

3.20

3.40

3.60

3.80

4.00

4.20

4.40

4.60

4.80

5.00

13 14 15 16 17

USD/MYR – near record high again

BOJ QQE1

BOJ QQE2

ECB QE

CNY deval

Fed hike

Fed taper

Brexit

DBSfConsensus

Trumpvictory



12

Thai baht

Our projected rise for the THB this year reflects a stron-ger USD, not a weaker THB

• TheTHBwasoneofthethreeAsiaexJapan(AXJ)currencies that appreciated in 2016. Thailand’s cur-rent account totalled 16.6% of GDP in 2016, its strongest balance on record. Foreign reserves in-creased the most in the region to $172bn in 2016 from $156.5bn in the previous year.

• TheBankofThailand(BOT)expectsabroad-basedrecovery in 2017 from three sectors – agriculture, exports and government spending. We see real GDP growth improving to 3.4% in 2017 from a pro-jected 3.2% last year.

• Yet,wedon’texpecttheBOTtofollowtheFedinhiking rates this year. The central bank has pledged to keep monetary policy accommodative to foster a recovery at risk from global uncertainties. CPI turned positive in Apr16 and rose to 1.55% YoY in Jan17, just above the 1.50% policy rate and off the floor of its official 1-4% target. We forecast infla-tion to average 1.5% in 2017.

• Asfortheexchangerate,theTHBremainshighlycorrelated with broad USD trends in the region. Its favourable fundamentals will, however, keep it volatile than its peers.

Indonesian rupiah

USD/IDR to rise with global USD trends but the IDR will be more resilient compared to regional peers

• USD/IDR has been stable in a tight 13260-13485range after the Fed hike last December. Unlike many of its peers in the region, USD/IDR has not been trading in the upper, but the lower half of its multi-year ascending price channel.

• DBSexpectsStandard&Poor’stoupgradeIndone-sia’s sovereign debt rating, currently at BB+ with a positive outlook. We remain optimistic that real GDP growth will accelerate to 5.3% YoY in 2017. The economy is projected to have grown 5.1% in 2016 and ended a five-year slowdown.

• Exportsfinallyturnedpositivein4Q16aftereightconsecutive quarters of contraction. The 13.9% YoY expansion in 4Q16 was also the first double-digit gain since 3Q11. The export recovery will be posi-tive for trade surpluses, which in turn, should help to keep the current account deficit stable around 2% of GDP this year.

• CPIinflationbottomedat2.79%YoYinAug16.Wesee inflation rising to 4.5% in 2016 from 3.5% in 2016, from the floor towards the ceiling of its of-ficial 3-5% target range. BI is only expected to raise rates in 2H17.

1-Feb 1Q17 2Q17 3Q17 4Q17

DBS 35.119 36.3 36.5 36.6 36.8Consensus 36.0 36.2 36.3 36.4

Projected trading bandCeiling 37.403 37.5 37.7 37.8 38.0Floor 35.024 35.1 35.3 35.4 35.6Slope 1.7% depreciation a year for THBWidth 3.4% around mid

28

29

30

31

32

33

34

35

36

37

38

28

29

30

31

32

33

34

35

36

37

38

10 11 12 13 14 15 16 17

USD/THB – back to mid of broad channel

US loses AAA

Fed taper

BOJ QQE2

BOJQQE1

ECB QE

CNY deval

Fed hike

Brexit

DBSfConsensus

Trumpvictory


31-Aug30-Sep

1-Feb 1Q17 2Q17 3Q17 4Q17

DBS 13370 13339 13518 13697 13876Consensus 13600 13740 13800 13826

Projected trading bandCeiling 14037 14152 14331 14510 14689Floor 12412 12526 12705 12884 13063Slope 5.3% depreciation a year for IDRWidth 6.4% around mid

8000

9000

10000

11000

12000

13000

14000

15000

8000

9000

10000

11000

12000

13000

14000

15000

11 12 13 14 15 16 17

USD/IDR – in the lower half of price channel

US loses AAA

Fed taper

BOJ QQE2

BOJ QQE1

ECB QE

CNY deval

Fed hike

Brexit

DBSfConsensus


Trumpvictory


13

Philippine peso

Expectations remain firm for USD/PHP to end this year above its psychological 50 level

• ThePHPhasbeenconsolidatingbetween49.20and50.15 vs USD since mid-Nov, after its sharp depre-ciation in Aug-Nov. The worst level hit this year, at 50.147 on 19 Jan, was not seen since Nov 2008. Consensus including us expect USD/PHP to end 2017 above 50 from high but slower growth, rising inflation and weaker budget and trade positions.

• Standard&Poor’swarnedinJanuarythatthecoun-try’s sovereign debt rating was at risk from deterio-rating external and fiscal positions. S&P currently rates the country at BBB with a stable outlook. President Duterte’s first (PHP 3.35trn) budget for 2017 is the largest given to any administration. Fi-nance Secretary Carlos Dominguez is pushing tax reforms to stave off a rating downgrade to junk.

• The currentaccount surplus fell to1%ofGDP in3Q16, its narrowest since 4Q08. The trade deficit in 2016 was worse than the previous three years. Un-like other countries, exports continued to contract amidst rising imports. CPI inflation rose to 2.5% YoY in Dec16 from its low of 0.9% in Feb16. With inflation moving off the floor of its official 2-4% target, the next move in rates is up.

Vietnam dong

USD/VND’s market rate is less anxious than its official rate to global USD trends

• TheStateBankofVietnam(SBV)liftedtheofficialmid-rate for USD/VND to 22,202 on 25 Jan from 22,159 at end-2016. Despite this, the market-led USD/VND fell to 22,585 from 22,761 for the compa-rable period.

• This should not come as a surprise. Investors re-mained confident in Vietnam’s growth potential in spite of the global geopolitical changes. Real GDP growth is expected to be above 6% for the fourth straight year in 2017. Vietnam stocks closed, as of 25 Jan, at their highest levels since Feb 2008.

• Exportsexpanded8.6%in2016from8.1%intheprevious year, its first full-year improvement since 2011. Vietnam was disappointed that US President Donald Trump cancelled the Trans-Pacific Partner-ship (TPP).

• Managing inflationwill be a challenge this year.After keeping inflation below the official target of 5% for 2016, the SBV is targeting an average 4% rate in 2017. While CPI was 4.74% YoY in Dec16, this was up from 0.80% in Jan16. Scepticism re-mains strong that SBV’s desire for stable rates will eventually give way to rate hikes.

1-Feb 1Q17 2Q17 3Q17 4Q17

DBS 49.819 49.8 50.2 50.7 51.1Consensus 50.2 50.6 50.8 50.5

Projected trading bandCeiling 50.445 50.7 51.1 51.5 52.0Floor 48.689 49.0 49.4 49.8 50.2Slope 3.3% depreciation a year for PHPWidth 1.8% around mid

40

41

42

43

44

45

46

47

48

49

50

51

52

40

41

42

43

44

45

46

47

48

49

50

51

52

13 14 15 16 17

USD/PHP – consolidating in upper half of channel

Fed taper

BOJ QQE2

BOJ QQE1

ECB QE

CNY deval

Fed hike

Brexit


DBSfConsensus

Trumpvictory

2-Feb 1Q17 2Q17 3Q17 4Q17

DBS 22640 22782 22782 22782 22782Consensus 22882 23000 23000 23200

Projected trading bandCeiling 23181 23181 23181 23181 23181Floor 22547 22547 22547 22547 22547Slope 0.0% depreciation a year for VNDWidth 1.4% around mid

20500

21000

21500

22000

22500

23000

23500

20500

21000

21500

22000

22500

23000

23500

12 13 14 15 16 17

USD/VND – stable again after Trump rally

Fed taper

BOJ QQE2

BOJ QQE1 ECB

QE

CNY deval

Fed hike

Brexit

DBSfConsensus


Trumpvictory


14

Indian rupee

USD/INR could still break above its 66.2-68.7 range es-tablished since early 2016

• USD/INR has been remarkably stable between66.2 and 68.7 since early 2016. Externally, the INR weathered global risks such as the CNY devalua-tion, Brexit and Trump’s victory at the US presiden-tial election. Domestically, the INR proved resilient to the redemption of Foreign Currency Non-Resi-dent (Bank) or FCNR (B) deposits and the demon-etisation of 500 and 1000 rupee notes.

• TheIndianstockmarketralliedinJanuaryinantici-pation of a more tax friendly budget (on 1 Feb) to make India a more competitive investment destina-tion. With inflation in the lower half of the official 4±2% target, there is room for one more rate cut by the Reserve bank of India (RBI).

• Evenso, there is little roomforcomplacency.TheINR was one of two Asia ex Japan currencies that did not appreciate in January. The demonetisation is, according to consensus, expected to push growth below 7% for three straight quarters into 2Q17. Higher oil prices and tax reforms could eventually lead to higher inflation and larger trade deficits at a time when the Fed is set to move from single to multiple rate hikes this year.

Australian dollar

AUD/USD to move gradually lower with Fed hikes, but this will be balanced by recovery prospects

• ConsensusiskeepingthedooropenfortheReserveBank of Australia (RBA) to deliver one more rate cut. Real GDP contracted 0.5% QoQ in 3Q16, more than the minus 0.1% expected by consensus. CPI inflation was 1.5% QoQ in 4Q16, below the 1.6% consensus.

• We,however,believethattheRBAismorelikelytokeep the cash rate target stable at 1.50% through 2017 instead.

• OnCPI,roseforthesecondstraightquarterfromitslow of 1.0% in 2Q16. More importantly, consumer inflation expectations increased to 4.3% YoY in Jan16, and hit 4% for the first time since Dec15.

• Ontheeconomy,tradetellsadifferentstory.Aus-tralia posted a trade surplus in Nov16, its first since Mar14. Exports performed strongly, helped by the rebound in commodity prices. On the domestic front, the jobless rate has risen again amidst slower wage growth.

• Withbothheadlineand core inflation stillbelowthe RBA’s 2-3% target, the RBA need not to follow the Fed in hiking rates.

1-Feb 1Q17 2Q17 3Q17 4Q17

DBS 67.475 69.6 70.5 71.4 72.4Consensus 68.5 68.9 69.0 69.0

Projected trading bandCeiling 73.201 73.8 74.7 75.7 76.6Floor 64.727 65.3 66.3 67.2 68.1Slope 5.3% depreciation a year for INRWidth 6.4% around mid

40

45

50

55

60

65

70

75

80

40

45

50

55

60

65

70

75

80

11 12 13 14 15 16 17

USD/INR – still flat near the top

US loses AAA

Fedtaper

BOJQQE

ECB QE

CNY deval

Fed hike

Brexit

DBSfConsensus

Trumpvictory


1-Feb 1Q17 2Q17 3Q17 4Q17

DBS 0.7582 0.71 0.70 0.70 0.69Consensus 0.73 0.72 0.72 0.72

Projected trading bandCeiling 0.7707 0.77 0.76 0.76 0.75Floor 0.6575 0.65 0.65 0.64 0.64Slope -3.2% depreciation a year for AUDWidth 8.8% around mid

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

13 14 15 16 17

AUD/USD – mild depreciation channel

BOJ QQE1

BOJ QQE2

ECB QE

CNY deval Fed

hike

Fedtaper

Brexit

DBSfConsensus


Trumpvictory


15

Recent Research

IN budget: a balanced approach 2 Feb 17

Rates: global rates roundup 2 Feb 17

TW: shifting into higher gear 27 Jan 17

SG: time to recalibrate 26 Jan 17

EZ: ECB stays defensive 24 Jan 17

ID: looking at an S&P upgrade 19 Jan 17

US: pop goes the headline 18 Jan 17

Asia cyclical dashboard 17 Jan 17

IN budget: stability over growth 12 Jan 17

Rates: SGS: US-dependent 10 Jan 17

IN: is oil the next headache? 13 Dec 16

Qtrly: Economics-Markets-Strategy 1Q17 8 Dec 16

ID: FDI much stronger than it appears 30 Nov 16

EZ: ECB challenged by higher bond yields 16 Nov 16

TW: 7 likely outcomes in 2017 15 Nov 16

Global: revenge of the demographic dividend 14 Nov 16

US: structural interest rate compression 2 Nov 16

FX: mid-quarter update 1 Nov 16

SG: down but not out 1 Nov 16

Rates: global rates roundup 31 Oct 16

TW: diversifying into Southeast Asia 21 Oct 16

CN: cyclical bottom 19 Oct 16

IN: assessing current account 18 Oct 16 improvement

PHgov bonds: expensive (still) 11 Oct 16

SGD: sticking to neutral 7 Oct 16

EZ: not taper time yet 7 Oct 16

CN: avoiding the Minsky moment 6 Oct 16

IN: monetary policy committee lowers rates 4 Oct 16

Qtrly: Economics-Markets-Strategy 4Q16 15 Sep 16

CNH: SDR inclusion - right time, right place 8 Sep 16

IN: savings rate in need of a boost 2 Sep 16

IDR: towards further resilience 1 Sep 16

SGS: on Fed watch 30 Aug 16

Global growth: redefining strength 26 Aug 16

TW: 5 things you need to know about the 18 Aug 16aging population

SG: risks beneath the GDP figures 18 Aug 16

CN: the risk of keeping status quo 17 Aug 16

CN: why falling private investment growth 12 Aug 16is a worry

ID: tax revenues slipping 11 Aug 16

SG: labour market pain 10 Aug 16

IN: monetary policy in transition 8 Aug 16

FX: DM vs EM - a more balanced story 1 Aug 16

Rates: Global rates roundup / chart-pack 1 Aug 16

IN: hopes high for GST 26 Jul 16

JP: will the helicopters fly? 20 Jul 16

ID rates: steepening risk 18 Jul 16

IN: more consumption-led growth 13 Jul 16

FX: revisions to GBP & JPY 8 Jul 16

Disclaimer:The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or finan-cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts and tables are CEIC and Bloomberg unless otherwise specified. DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.

usd strength hits a roadblock - dbs bank usd strength hits a roadblock 3 february 2017 1 ... but...

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