FX WatchAsian FX recovery to last?

Group Economics

Macro & Financial Markets Research

Roy Teo +65 6597 8616

Arjen van Dijkhuizen, +31 20 628 8052

9 October 2015

• Less bearish on Asian currencies as cautious Fed supports Asian currencies temporarily

• Asian central banks likely to ease monetary policy to support and re-inflate economy…

• …reducing Asian currencies’ carry attractiveness

• Our new year-end forecast USD/CNY are 6.40 (2015) and 6.55 (2016), respectively

• Weaker euro, Chinese yuan and Japanese yen will weigh on Asian economies’ exports price

competitiveness

• Indonesian rupiah to underperform other Asian currencies

Cautious Fed to support sentiment in Asian currencies

Asian currencies have recovered after the US jobs report on 2

October, which revealed that non-farm payrolls were weaker

than expected in August and September. We now expect the

US Federal Reserve to delay tightening monetary policy until

June 2016 (from December 2015). This should support

sentiment in Asian currencies in the coming weeks. Hence we

have become less bearish on Asian currencies, with the

exception of the Thai baht (THB).

Recovery in Asian currencies temporary

We expect the current recovery in Asian currencies to be

temporary for the following reasons. Reduced fears of capital

outflows from Asian economies will allow more flexibility for

Asian central banks to ease monetary policy to support the

economy. This will reduce Asian currencies’ carry

attractiveness. In addition, a stronger currency is not likely to

be welcomed given the current weak exports and inflation

dynamics in most Asian economies. A slowing Chinese

economy (we forecast economic growth of 6.5% in 2016,

versus around 7% this year) will provide less support to Asian

exports. Last but not least, a weaker euro, Chinese yuan and

Japanese yen will weigh on Asian exports competitiveness.

Chinese yuan at equilibrium; no depreciation?

The People’s Bank of China (PBoC) determination to support

the Chinese yuan, after the August yuan devaluation caused

widespread market turmoil, and our more cautious Fed view

have made us less bearish on the yuan. However, we still

expect some depreciation, as a weaker yuan helps to inflate

the economy and support exports. Our 2015 and 2016 year

end USD/CNY forecasts are now 6.40 (from 6.55) and 6.55

(from 6.75). We expect the offshore yuan (CNH) divergence

with the onshore yuan (CNY) to be minimal in the coming

months as financial markets sentiment improve. However the

CNH discount to the CNY will widen next year due to a slower

Chinese economy and tighter monetary policy in the US, which

is not yet fully priced in.

THB forecasts downgraded

We now expect the Thai baht (THB) to depreciate further to

36.8 against the US dollar (from previous forecast of 36.4).

Our more bearish view on the THB is due to continued

sluggish consumer and business confidence which will weigh

on economic growth and leads to rising risks for the banking

sector (higher NPLs). Political uncertainty will remain a

headwind to foreign investors inflows. In addition, a weaker

THB is needed to support exports and re-inflate the economy.

Furthermore, we think that it is unlikely that the Bank of

Thailand (BoT) will support the THB aggressively given that FX

reserves are now about 10% lower than during the Fed

tapering dry run in mid-2013. The BoT could even aim at

replenishing its FX reserves in the coming months. If market

conditions are conducive in the coming months, a rate cut to

stimulate the economy is also likely.

IDR to underperform other Asian FX

We expect the Indonesian rupiah (IDR) to underperform other

Asian currencies well into 2016. Indonesia’s external

imbalances, low real short term interest rates and weak

economic fundamentals persist. We also expect Bank

Indonesia to replenish its foreign currency reserves which

have declined by about 10% this year.

Asian FX forecasts

Source: ABN AMRO Group Economics

09-Oct Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016

USD/CNY (onshore) 6.35 6.40 6.45 6.50 6.55 6.55

USD/CNH (offshore) 6.34 6.40 6.47 6.53 6.57 6.57

USD/INR 65.1 65 66 66 67 67

USD/KRW 1,159 1,190 1,200 1,220 1,230 1,240

USD/SGD 1.40 1.44 1.46 1.48 1.50 1.50

USD/THB 35.69 36.80 37.00 37.20 37.50 38.00

USD/TWD 32.70 33.00 33.50 33.70 33.80 34.00

USD/IDR 13,478 14,300 14,500 14,800 14,900 15,000

2 FX Watch - Asian FX recovery to last? - 9 October 2015

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