CIBC`s Monthly FX Outlook

Monthly FX Outlook
March 11, 2015
Currency Strategy Highlights
• All good things must come to an end, even a remarkable bull run in the USD. The market
Economics
Nick Exarhos
ECONOMICS
TORONTO
(416) 956-6527
nick.exarhos@cibc.ca
Avery Shenfeld
ECONOMICS
TORONTO
(416) 594-7356
avery.shenfeld@cibc.ca
Jeremy Stretch
MACRO STRATEGY
LONDON
+44 (0) 207-234-7232
jeremy.stretch@cibc.co.uk
Patrick Bennett
MACRO STRATEGY
HONG KONG
+852 3907 6351
patrick.bennett@cibc.com.hk
John H Welch
MACRO STRATEGY
TORONTO
(416) 956-6983
johnh.welch@cibc.ca
http://research.
cibcwm.com/res/Eco/
EcoResearch.html
has yet to fully account for rapidly approaching Fed hikes, the first of which should come
by June. That will give a last leg to USD strength, before better news overseas allows
other majors to hold ground versus the greenback.
• Tighter policy from Yellen will see a bit more near-term downside in the C$. Better global
growth and a recovery in resource prices will allow the loonie to recoup some of its
losses near the end of this year, but a need for rebalancing toward exports and business
investment will prevent a sharp rally in the Canadian dollar further out. We see the loonie
bottoming at 78 cents-US in 15Q2 (USCAD 1.29).
Events
to
Watch
in
Coming Month
• The FOMC meets on the 17th and 18th, and the committee should be ready to drop
“patience” from its message on rates. That’s likely to serve as a wake-up call to the bond
market, and in the process start the last leg of greenback strength.
• A potential deal with Iran on its nuclear program is a development worth watching for
oil-related currencies. Negotiations with Greece are the Eurozone’s wildcard.
Currency Outlook
End of period:
11-Mar-15 2015 II 2015 III 2015 IV
US$ Rates:
USDCAD
EURUSD
USDJPY
GBPUSD
USDCHF
AUDUSD
USDBRL
USDMXN
USDKRW
USDCNY
USDSGD
USDTWD
USDMYR
USDINR
Other Crosses:
CADJPY
AUDCAD
GBPCAD
EURCAD
EURJPY
EURGBP
EURCHF
EURSEK
EURNOK
2016 I
2016 II 2016 III 2016 IV
1.27
1.06
121
1.50
1.01
0.76
3.12
15.60
1126
6.26
1.39
31.7
3.70
62.8
1.29
1.06
122
1.45
1.00
0.76
2.88
15.15
1110
6.26
1.38
31.4
3.65
61.5
1.29
1.05
125
1.48
1.00
0.74
2.86
15.45
1105
6.25
1.39
31.2
3.55
61.3
1.26
1.09
122
1.50
0.98
0.76
2.97
15.60
1100
6.22
1.38
31.1
3.50
61.3
1.24
1.12
117
1.52
0.96
0.79
3.02
15.14
1090
6.19
1.37
30.9
3.47
61.0
1.23
1.15
116
1.55
0.94
0.81
3.05
14.69
1080
6.16
1.36
30.7
3.42
61.0
1.22
1.18
115
1.57
0.92
0.83
3.05
14.26
1070
6.12
1.35
30.6
3.40
60.8
1.24
1.21
114
1.59
0.90
0.85
3.04
13.83
1060
6.08
1.34
30.4
3.38
60.5
96
0.97
1.91
1.34
129
0.70
1.07
9.13
8.66
95
0.98
1.87
1.37
129
0.73
1.06
9.15
8.55
97
0.95
1.91
1.35
131
0.71
1.05
9.05
8.45
97
0.96
1.89
1.37
133
0.73
1.07
8.95
8.40
94
0.98
1.89
1.39
131
0.74
1.08
8.90
8.35
94
1.00
1.91
1.41
133
0.74
1.08
8.85
8.30
94
1.01
1.92
1.44
136
0.75
1.09
8.80
8.25
92
1.05
1.97
1.50
138
0.76
1.09
8.75
8.20
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CIBC World Markets Inc.
Monthly FX Outlook - March 11, 2015
All Good Things Must Come to an End
But we would take a 1% year-end fed funds futures
rate as a signal to cash in on long dollar positions
against most majors. With the Fed fully priced for 2015,
the market could begin to focus on other fundamentals
that could lean the other way.
Long dollar positions have been steadily rewarded in
recent months, as an improving American economy
and labour market (Chart 1, left) have stood in sharp
contrast to developments overseas, where growth and
geopolitical worries have left investors seeking safety—
and a relative abundance of yield—in US securities. But
though that trend is to continue in the near term, all
good trades must come to an end, and this one could
be over by late spring.
The evidence is beginning to build that the dollar is
overshooting what the US can sustain on the trade
side, particularly if oil rebounds and raises nominal
imports. Export orders have started to languish (Chart
1, right), denting the performance of the real economy.
Exporters are also registering a visible dent to profits,
the key longer term driver for capital spending, as
foreign sales get translated into fewer greenbacks.
The near-term underpinnings for the USD are clear.
While aggressive monetary policy in Europe and parts
of Asia is now well priced into yields and FX markets,
the market has yet to fully capture the coming turn
from the Fed. Yellen’s recent testimony cemented our
own view that “patience” will be dropped from the
FOMC’s next message, paving the way for a June rate
hike.
Further into the year, the payoffs from monetary
stimulus could be more visible in the performance of
overseas economies. Not that they will outperform the
US or raise rates for several years to come, but enough
that there won’t be fresh downside surprises to keep
the dollar on the rise.
Although US Q1 GDP now looks to be a bit below 2%,
more seasonal weather, solid labour income gains from
new jobs, and the accumulated savings from several
months of cheaper gasoline prices should provide a
powerful lift this spring. Recently announced wage
hikes by major retailers will spill over to other sectors,
providing enough justification to move on rates despite
tame core and negative headline inflation. Futures are
pricing in barely more than a 0.5% year-end funds rate,
but a hike in June would quickly tack on a further 50
bps to expectations. That should see one final leg to
USD strength this spring.
One Less Reason for C$ Weakness
Before the Bank of Canada’s rate announcement last
week, markets were pricing in 99% odds that the
overnight rate would be below 75 bps at year-end
(Chart 2, left), implying that a further cut was only
a matter of timing. That was, in part, based on the
Bank’s prior history which showed no tendency for
a single isolated cut or hike in the past, the scar that
weak oil was likely to leave on business investment
Chart 2 - Another Cut No Longer Certain (L),
Crude Surplus Slashed (R)
Chart 1 - Payroll Gains Fastest Since Late-90s (R),
But Strong Greenback Stalling Real Exports (L)
91 95 99 03 07 11 15
Implied Probabilities for
Dec-15 BoC O/N Rate (%)
100
80
Dec-14
Jun-14
Sep-14
Mar-14
Dec-13
Jun-13
-6
Sep-13
-4
-8
60
58
56
54
52
50
48
46
Mar-13
Cumm. 12-mon chg in Payrolls 116
114
112
4 mn
110
108
2
106
104
0
102
100
-2
98
6.0
60
5.0
40
4.0
20
3.0
0
Trade-Weighted USD
(Jan-97=100, L)
ISM Mfg: New Export
Orders Index (R)
Crude & Products Trade Bal
C$ bn
7.0
Day before
Mar BoC Mtg
Now
less than 75bps
75bps or higher
2.0
1.0
0.0
Jun-14
Jan-15
Source: Bloomberg, Statistics Canada, CIBC
Source: BEA, Census Bureau, CIBC
2
CIBC World Markets Inc.
Monthly FX Outlook - March 11, 2015
and government spending, and the dovish talk that
accompanied the first cut.
The details of the ECB’s plan allow it to purchase
securities that yield more than its -0.20% overnight
deposit rate. That has pushed the front end of the
German yield curve into negative territory, all the
way out to securities maturing in six years. The use
of negative overnight yields in Europe has proven to
be a strong driver of euro weakness, as the market
continues to eye the potential for another move lower
in the central bank’s mandated rate. Furthermore,
though rates still have room to move higher in the US,
their relative attractiveness, and the greenback’s broadbased strength, has encouraged an exodus from the
common currency. An overshoot of our 1.05 forecast
for 15Q3 is of course a risk if the Greek situation gets
messier.
But the verbiage accompanying the Bank’s stand-pat
decision leaned the other way, with the BoC suggesting
that the first cut had done a lot to ease monetary
conditions. In saying that it sees the blow from crude
being “even more front-loaded” than previously
assumed, the Bank signaled its willingness to stomach
significant disappointments versus the existing nearterm forecast. Though we dropped a second cut from
our forecast, greater-than-assumed USD strength will
still likely get us to 1.29 on dollar-Canada in June.
The C$ will see some short-term weakness if, as we
expect, the Fed hikes US rates in June, earlier than
now priced in. Furthermore, despite crude prices
recently stabilizing, there’s little chance of an immediate
v-shaped recovery with global growth still fragile, and
with US supply not yet responding to falling rig counts.
That will leave more pain in the near-term for Canada’s
goods trade balance, where more than half of the oilrelated surplus has been shaved (Chart 2, right).
Once this year’s Fed tightening is fully priced in, it
should be time to cash in on short euro positions. With
yield differentials fully baked in, markets could begin
to focus on other fundamentals that will be more
supportive for the euro. We were well ahead of the
ECB in looking for an improvement to roughly 1½%
real GDP growth for the Eurozone this year (Chart 3,
left), lifted by exports driven off a weaker euro and the
consumer boost from cheap gasoline, of which there
are already some early positive signs (Chart 3, right). US
trade and current account balances already show that
the euro is moving into undervalued territory. Blindly
buying Treasuries for the yield pick-up could start to
look like a less obvious trade for those recognizing the
potential for currencies to, at some point, drift back
to fair value.
Firmer expectations for global growth in 2016, a
gradual recovery in oil, and a long pause in Fed
tightening at a mild 1% funds rate, should enable the
C$ to recover some of its lost ground late this year and
into 2016. But that rebound will be held in check by a
longer-term need for rebalancing growth from housing
and debt-financed consumption towards exports and
business capital spending, with a competitive exchange
rate remaining key to that story.
Chart 3 - ECB Forecasts Catch Up to Our Own (L),
With Greenshoots in Retail Sales (R)
Euro: A Final Overshooting
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
March 9th ushered in the QE era in the Eurozone,
with EUR60 bn per month in purchases slated until
September of next year. ECB’s plan to reflate its balance
sheet should keep the euro on the cheap side of
where current account and trade fundamentals might
dictate, even if the central bank’s action is becoming
increasingly priced into the currency. As Draghi pumps
a steady flow of new euros, and the market prices in
2015 action from the Fed, there’s scope for slightly
more downside in EURUSD through the first half of
this year.
Eurozone Real Retail Sales
2014
2015
2016
Dec-14 (Eurosystem Staff)
Mar-15 (ECB Staff)
CIBC
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
YoY %
Source: ECB, Eurostat, CIBC
3
CIBC World Markets Inc.
Monthly FX Outlook - March 11, 2015
BoE On Hold as Elections Loom
Don’t Rule Out the BoJ Just Yet
Though rates have been on hold for six years at 0.5%,
the Bank of England may soon be contemplating a
policy turn of its own. The UK economy continues
to grow above its potential, with recent data
suggesting that Q1 activity is poised to register a 0.6%
unannualized gain. Because the economy has been
able to maintain an above-trend pace, spare capacity
could be narrowing faster than the Bank of England
is currently anticipating. And though other European
economies have yet to reclaim their pre-recession
peaks, the annualized 2.7% advance in Q4 has left UK
GDP nearly 2.5% higher than its pre-crisis high-water
mark.
Though UST-JGB spreads moved towards the highs of
the year, investors are becoming increasingly hesitant to
drive a commensurate spike higher in USDJPY. Indeed,
even the authorities apparently view the JPY as trading
in the correct range, with Economics minister Amari
hinting that neither excessive strength nor weakness in
the JPY is desirable. Taking those clues, investors have
pared negative JPY speculative skew back to levels not
seen in several years (Chart 5, left).
That move underlines the decreasing expectations of
another round of BoJ easing in the near term. But in
terms of potential action, BoJ Chief Kuroda continues
to argue that monetary policy could be adjusted
without hesitation, should conditions warrant it. And
though a fall in oil is a definite positive for Japan’s
economy, a miss on the 2% CPI target for 2015 (Chart
5, right) might still cause the BoJ to act once more.
Furthermore, with domestic investors continuing to
seek higher-yielding foreign bonds, the yen may have
to get weaker still before curbing the Japanese appetite
for foreign currencies.
We share Governor Carney’s view that weaker oil prices
are an unambiguous positive for the UK. With labour
markets tight and average earnings accelerating, a
lower profile for CPI supports what should be solid
gains in real consumption (Chart 4, left). Furthermore,
UK consumers are getting an added lift from retailers
who are competing for their business through lower
prices.
However, there’s an added complication to policy
normalization for the BoE that the Fed doesn’t have to
contend with. UK elections are slated for May 7th, but
markets are currently pricing in little disruption from
such an event. We’re of the view that the elections will
mean that monetary policy might be on hold for longer,
given the still-uncertain nature of the results (Chart 4,
right). That leaves a little bit more near-term GBPUSD
downside, though there should still be upside in going
long sterling versus the euro.
Still-Lower Rates for Australia Ahead
While the RBA may have left rates on hold last month,
pressure will mount to cut policy rates further, from
an already record low of 2.25%. The Bank has been
hesitant to ease borrowing conditions since Australia
possesses the fourth highest level of household debt
as a share of GDP amongst the majors at 113%. But a
Chart 5 - Speculators Paring Yen Shorts (L), But Falling
Inflation Expectations Might Stir BoJ Into Action (R)
Chart 4 - UK Earnings Now Outpacing Inflation (L),
Though Election Uncertainty Might Stall BoE (R)
YouGov/The Sun
Populus
Yen Net Non-Commercial
Short Positions
15
0
10
CPI
Jan-15
Sep-14
May-14
Jan-14
Sep-13
May-13
Jan-13
-1
5
0
Earnings
Source: ONS, YouGov, Populus, CIBC
Consensus Expectations for
2015 YoY CPI (%)
2.0
1.8
1.6
1.4
1.2
1.0
Jan-15
20
Nov-14
25
1
000s contracts
140
120
100
80
60
40
20
0
Jul-14
30
2
Sep-14
%
Mar-14
35
May-14
YoY %
Jan-14
3
0.8
Source: CFTC, Bloomberg, CIBC
4
CIBC World Markets Inc.
Monthly FX Outlook - March 11, 2015
softening in global growth has hit Australia’s resourcelevered economy, with the realities on the ground likely
to force Stevens’ hand once more.
Dovish Talk Not Likely Enough to Weigh on SEK
Despite the Riksbank surprising the market last month
by taking interest rates negative and announcing
a QE program worth SEK10 bn per month, we’ve
witnessed a rebound in the SEK, much to the chagrin
of the central bank. But then again, the Swedish
monetary stance remains less aggressive than that
of the Eurozone. Moreover, we have seen the SEK
react to recent data, with GDP, industrial output and
forward-looking PMI all suggesting a more encouraging
economic environment.
In trying to avoid the need for lower rates, the RBA
has explicitly tried to induce a slide in the aussie dollar.
Unlike the BoC’s Governor Poloz who maintains his
innocence regarding his bias for a cheaper national
currency, the RBA’s Governor has consistently—and
successfully—talked down the aussie over the last few
months.
With that in mind, it’s no surprise then that the
RBA statement references the currency as above its
fundamental value given commodity price declines,
and states that “a lower exchange rate is likely to be
needed to achieve balanced growth in the economy”.
While the current account deficit narrowed in Q4,
the price of iron ore continues to plumb new lows as
China’s demand slows (Chart 6), suggesting further
pain ahead.
Q4 GDP came in double what had been expected with
the quarter’s 1.1% good enough to take the year-onyear level to 2.7%—the highest since 11Q3. That has
made the central bank’s job of convincing the market
that backward-looking measures aren’t a guide to
future monetary policy guidance more difficult.
Furthermore, the advance in the currency is also
feeding off a continued slide in inflation expectations,
which Governor Ingves has referred to as getting
near the ‘discomfort zone’. That kind of talk from the
governor suggests that more action could be coming
when the Bank next meets on April 29th, with the Bank
remaining concerned that the currency’s strength is
arresting any positive upticks in inflation.
Furthermore, a compression in 10-year rates versus the
US should continue, with the differential headed to
zero by mid-year. That favours additional cheapening in
the currency as the market continues to eye the RBA’s
next moves.
Chart 6 - China’s Demand Growth for Iron Stalls, Denting
Prices for Australia’s Key Commodity Export
85
mn tonnes
$/tonne
160
Norges Bank to Act
Unsurprisingly, the performance of the NOK remains
highly correlated with that of oil. The one-week, onemonth, and one-year inverse correlations all currently
remain between 0.80 and 0.85. That’s something we’ve
kept in mind when charting the performance of the
currency over the next 12 months. Given the potential
for firmer oil prices in the back half of this year, we look
for EURNOK to trend lower.
Jan-15
40
Oct-14
55
Jul-14
60
Apr-14
60
Jan-14
80
Oct-13
65
Jul-13
100
Apr-13
70
Jan-13
120
Oct-12
75
Jul-12
140
Apr-12
80
Jan-12
However, since the central bank is likely to struggle to
get its dovish message ahead of the ECB’s QE program,
and since domestic Swedish data remains largely
supportive, we look for ongoing EURSEK downside.
China Iron Import Volumes (L)
62% Iron Ore Price (R)
Source: Customs General Administration (PRC), Bloomberg, CIBC
That being said, in the context of the domestic
fundamentals, the legacy of oil’s slide will see a
dramatic decline in investment, while near-term
fundamentals are also showing softness (manufacturing
output slumped by 3.7% in January).
5
CIBC World Markets Inc.
Monthly FX Outlook - March 11, 2015
Those factors favour additional monetary stimulus from
the Norges bank, which promised to closely monitor
oil’s effects on the economy when they cut rates in
December. With consumer confidence in Q1 having
declined to 7.4, the lowest reading since the great
recession, the bank is as likely as ever to weigh added
measures.
Chart 7 - USDBRL Spot, the SELIC Policy Rate, and Inflation
16%
12%
IPCA inflation (% YoY, L) Forecast
SELIC rate (L)
Inflation target
USDBRL (R)
3.0
2.5
2.0
8%
The most likely scenario involves another 25-bp cut at
the March 19th meeting, to bring rates to 1.00%, with
the risk of at least an additional quarter-percent cut in
Q2 should underlying real economy prove to remain
under near-term pressure. However, even if the central
bank continues to lower rates, expect that to merely
slow rather than arrest the medium-run downtrend in
EURUSD, with external oil price dynamics to come more
into play as the year progresses.
3.5
1.5
TARGET
1.0
4%
0.5
0%
Aug-10 Oct-11 Nov-12 Dec-13 Feb-15 Mar-16
0.0
Source: Banco Central do Brasil, IBGE , CIBC
The IBGE reported that February IPCA inflation came in
at 7.7% year-on-year, just above our forecast. Inflation
is to remain above 7.0% in the first half before starting
to slowly fall in H2 2015 (Chart 7). This reaffirms our
revised view that the COPOM will undertake three
more 25-bp hikes to bring the SELIC to 13.50% in July.
Will Levy’s Plan Last?
Though USDBRL shot northward to above 3.00
on strong US numbers, the Petrobrás scandal, and
problems in congress threatening the fiscal adjustment,
we remain buyers.
The Banco Central reported a much better-thanexpected January primary surplus of BRL21.1 bn,
following the extremely poor numbers in December.
The nominal balance came in with a surplus of BRL3.0
bn corresponding to a 12-month deficit of 6.4% of
GDP—better than the prior 6.7%. These solid results
show genuine improvement, and are the products of
the work undertaken by Ministers Levy and Barbosa.
Serious questions about whether this improvement will
last over the next few months, however, remain of key
importance to our forecasts.
New Finance Minister Joaquim Levy and team have
faced some political opposition but continue on their
crusade to resuscitate Brazil’s credibility. The initial
program improves the primary result BRL57 bn. The
new team cannot yet cut budgetary spending as
congress has not passed the 2015 budget. The program
sees cutting expenditures by BRL30 bn through
reducing the length of widows’ pensions according
to age, increasing the subsidized TJLP (Long Term
Interest Rate) on loans from the state-owned banks,
reducing bonuses to government employees, reducing
unemployment benefits, and reducing energy subsidies.
Banxico to Tighten in Second Half
The government also seeks to raise BRL26.6 bn in
additional revenue by increasing taxes on consumer
durables, increasing the IOF tax, and increasing fuel
taxes. The new finance team also put in place a
reduction in exemptions on payroll taxes but was
delayed for three months. For now, all of these
initiatives are already binding through temporary
decrees that need ultimate approval by congress, where
resistance is still fierce.
At some point, the fall in the peso will have some, if
muted, inflationary impact. Since we maintain that
Banxico is too loose, we have significantly revised our
forecasts for USDMXN higher, at least through the first
US Fed hike.
We expect Banxico to become more hawkish and start
tightening in the second half of this year, whether
6
CIBC World Markets Inc.
Monthly FX Outlook - March 11, 2015
the US Fed starts tightening or not. Higher growth
and tighter money should reveal that the current level
of USDMXN is too high. Once we see more signs of
growth and a more hawkish Banxico, we will remove
our bullish bias and begin to propose selling the pair.
Until then, we will maintain our bearish peso bias.
undertake fiscal adjustment in 2016 and would appear
in the 2016 budget due in congress in September. The
government is curtailing some spending in the shortterm but will probably wait until after July mid-term
elections for aggressive measures.
INEGI reported that bi-weekly CPI inflation came in at
3.04% year-on-year in February, almost at the target.
The precipitous drop in inflation to the target came in
December due to the price effects of telecom reform
which dropped rates significantly. Despite the declining
trend in headline inflation and the still-weak but
recovering economic activity, a high USDMXN as well
as US Fed tightening should prompt Banxico to start
increasing its fondeo rate. Hence, we have Banxico
moving at the beginning of 2015Q3 and increasing
the fondeo by a total of 50 bps to end 2015 at 3.5%
(Chart 8).
CNY Divergence Between Trade-weighted and
USD Levels
Investor concern regarding capital outflows from China
and a broadly firmer USD overall has seen USDCNY and
USDCNY both gain around 1% year to date. Assuming
some further USD strength, we can see both spots
modestly higher, but we expect those moves to be
compensated by further trade-weighted gains for the
Chinese currency as the balance of supply and demand
remains positive.
A notable divergence has emerged between both
of those moves (vs. USD and trade-weighted), a
development that we would expect to close over
coming months (Chart 9). On the capital outflow,
concerns in the market appear, at this stage, to be
overblown. The external balance remains positive and
evidence of China accommodating some of the outflow
by running down reserves and then compensating for
the impact on the domestic market by cutting the RRR,
suggests a topside blowout in USDCNY is still unlikely.
China’s NPC has announced a target for GDP of around
7%, in line with expectations. The drive to re-orient the
economy toward a higher share of domestic demand
and to pursue quality over quantity of growth remains
intact.
The February PMI (HSBC) came in at 54.4, above the
neutral 50 threshold for the seventeenth successive
month. Although it has been at the lowest level since
November 2014, February’s number continues to
signal solid improvement in overall business conditions.
However, input price inflation accelerated to its fastest
pace in over two and a half years, which was mainly
linked to higher costs for imported raw materials.
Though imported prices have been influenced higher
through a cheaper currency, lower oil prices mean
lower government revenues. Finance Minister Luis
Videgaray announced that the government would
Chart 8 - Mexico: USDMXN, Fondeo Rate, Headline and
Core Inflation (y-o-y %)
7.0
16
Forecast
6.0
5.0
4.0
3.0
2.0
1.0
CPI inflation (y/y %, L)
Core inflation (y/y %, L)
Fondeo rate (L)
USDMXN (R)
0.0
Aug-10
Nov-12
Jan-15
Chart 9 - Watch For Divergence Between USDCNY and
Trade-weighted to Close
142
15
140
14
138
13
136
12
134
11
132
10
130
9
128
6.05
6.10
6.15
6.20
6.25
126
8
124
Jan-13
7
Mar-17
6.00
6
Jul-13
CNY NEER (L)
Jan-14
Jul-14
Jan-15
6.30
USDCNY (R, Inverted)
Source: Bloomberg, CIBC
Source: Banxico, Bloomberg, CIBC
7
CIBC World Markets Inc.
Monthly FX Outlook - March 11, 2015
KRW Stable, BoK With Room to Ease
INR Supported by Pro-active Policies
Stability best describes the recent track of USDKRW,
with spot having traded in a range of 1080-1120 since
November of last year. That stability is similarly reflected
in the track of KRW against the JPY, with JPYKRW
within 9.05-9.45 since December.
Positive impulses have been forthcoming for the INR
recently, with the budget announcement having been
well received, to the extent that the RBI delivered an
inter-meeting cut of 25 bps in the key benchmarks,
the second such cut this year. The message with the
latest cut referenced the budget and also noted that
disinflationary pressures were developing at a faster
pace than had been expected.
South Korea announced a record trade surplus in
February of $7.7 bn, though the makeup was less
bullish, with imports falling near 20% (some of it
was value related via lower oil prices). Other recent
indicators have been mixed; IP was soft and CPI printed
at another lower-than-expected level.
USDINR spot and NDF markets have been stable this
year and we expect that to continue. Some positive
expectation for INR may however be tempered by RBI
comments on the currency, with references highlighting
that INR has remained strong relative to peer countries
and that an excessively strong currency is undesirable.
While it is true over the last year when the INR has
outperformed other Asian currencies and has been near
flat to the USD, it is still weaker by 28% against the
USD during the last three years and near the weakest
of Asian currencies during that time. We expect USDINR
to remain stable inside a range of 60.00-63.00. We
continue to recommend buying INR against the USD
and EUR.
Brighter spots were in recoveries in March business
surveys, the manufacturing index rebounding to 82
from 73, the best since May of last year. BoK kept rates
on hold recently, but with disinflationary pressures
prevailing and the currency stable, we expect they
will be under pressure to ease when they meet next
on March 12th. With regard to inbound investment,
portfolio flows to bonds is a year-to-date positive total
of $5.7 bn, whereas equity inflows have been a more
modest $830 mn in the same time frame (Chart 10).
MYR Challenges Now Present Value Opportunity
Chart 10 - Portfolio Inflow to South Korean Bonds is
Tracking Positively
After months of underperformance, primarily on soft
oil prices, and also on domestic political concerns,
MYR remains soft, even if we still consider it to be
undervalued at present levels. Malaysia recently revised
its current year fiscal deficit to 3.2% of GDP from
3.0% and GDP target to 4.5–5.5% from 5–6% on
the back of weaker oil prices. On the positive side of
the wider deficit, the figure would be 3.9% without
spending cuts. January trade data again showed a
strong surplus, coming in at MYR9 bn, though two-way
trade saw a contraction. Lower prices for commodities
account for softer exports, while a drop in imports of
capital goods remains something we’ll be monitoring.
We still see value in short EURMYR and look for the
underperformance of MYR against Asian peers to be
corrected.
South Korea Bond Inflow (net purchases) USD mn
40000
35000
30000
25000
20000
2012
2013
2014
2015
15000
10000
5000
0
-5000
1
6
11
16
21
26
31
36
41
Week
46 51
Source: Bloomberg, CIBC
8
CIBC World Markets Inc.
Monthly FX Outlook - March 11, 2015
SGD More Easing Expected in April
Sometime around April 10th–12th is the likely date
for the MAS bi-annual policy review. We expect that
following the surprise easing of policy on January 28th,
a more wide-ranging review and potential re-calibrating
of policy will be in store. In January, the MAS reduced
the slope of the SGD NEER band; we assume the slope
is now +1%. On that measure SGD remains near the
low side of the band limit, we estimate for USDSGD
that is currently around 1.3730-50.
Interest Rate
and
Economic Outlook
End of period:
2015 II 2015 III
0.75
Canada Overnight target rate 0.75
2-Year Gov't Bond
0.60
0.80
10-Year Gov't Bond
1.70
2.00
Federal Funds Rate
0.25
0.75
US
2-Year Gov't Note
1.20
1.50
10-Year Gov't Note
2.65
3.00
0.05
Eurozone Refin.operations rate 0.05
2-Year Gov't Bunds
-0.05 -0.05
10-Year Gov't Bunds
1.10
1.10
Bank rate
0.50
0.50
UK
2-Year Gilts
0.60
0.75
10-Year Gilts
1.75
2.10
Overnight rate
0.10
0.10
Japan
2-Year Gov't Bond
0.05
0.05
10-Year Gov't Bond
0.40
0.40
2015 IV 2016 I 2016 II
0.75
0.75
1.00
1.00
1.20
1.40
2.00
2.10
2.40
1.00
1.00
1.00
1.60
1.50
1.50
2.85
2.75
3.00
0.05
0.05
0.05
-0.05 0.05
0.05
1.20
1.30
1.40
0.75
1.00
1.25
1.05
1.25
1.50
2.20
2.35
2.45
0.10
0.10
0.10
0.10
0.10
0.10
0.45
0.50
0.50
Canada
Real GDP growth (%)
Unemployment rate (%)
CPI (%)
Real GDP growth (%)
US
Unemployment rate (%)
CPI (%)
Eurozone Real GDP growth (%)
Unemployment rate (%)
CPI (%)
Real GDP growth (%)
UK
Unemployment rate (%)
CPI (%)
Japan
Real GDP growth (%)
Unemployment rate (%)
CPI (%)
9
2013
2.0
7.1
0.9
2.2
7.4
1.5
-0.4
11.9
1.3
1.7
7.6
2.6
1.6
4.0
0.4
2014
2.5
6.9
1.9
2.4
6.2
1.6
0.9
11.6
0.4
2.6
6.3
1.5
-0.1
3.6
2.7
2015
1.9
6.8
0.8
3.0
5.5
0.5
1.5
11.2
0.0
2.2
5.8
0.5
0.8
3.5
0.9
2016
2.5
6.4
2.2
2.4
5.3
2.8
1.9
10.8
1.6
2.4
5.5
2.0
1.3
3.5
1.7
CIBC World Markets Inc.
Monthly FX Outlook - March 11, 2015
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