Asia Strategy Apr-18 - mizuhobank.com · Asia FX Strategy ― Apr ‘18: Risk Re-pricing ― Resurgent UST yields catalyse rather than exclusively drive Asian currency weakness

Asia FX Strategy ― Apr ‘18: Risk Re-pricing ―

Resurgent UST yields catalyse rather than exclusively drive Asian currency weakness. Not just because lingering risks of US-China trade friction, with threats of adverse collateral damage, alongside escalating oil prices (reflecting geo-political premium instead of “feel-good” optimism about demand) are key determinants of Asia FX drag. Instead, past evidence (e.g. “Taper tantrums” in summer of 2013, the “China shock” in the summer of 2015) that more significant downside to Asia FX usually corresponds to a sharp risk re-pricing (pick-up in risk premium); not merely parallel moves to UST yields. And in this regards, we remain very watchful of triggers that catalyse UST yield curve steepening (as term premium tends to see EM fund allocation diminish), escalating and retaliatory trade developments and the impending global liquidity withdrawal slated for Q3.

3 May 2018

Mizuho Bank, Ltd. Asia & Oceania Treasury Department

Vishnu Varathan Head, Economics & Strategy [email protected] Chang Wei Liang FX Strategist [email protected]

- 1 -

Executive Summary • USD rebound triggered by surging US yields coinciding with a pause in

convergence trades, as EZ’s momentum and Japan’s inflation slip

• AXJ: Nascent risk re-pricing on resurgent UST yields & USD compounded by oil’s surge, US-China trade risks, and impending global liquidity withdrawal .

• CNY: It is misguided to think that CNY devaluation will be a weapon of trade

war given the pain and cost of the 2015 “China shock”; stability overrules!.

• INR: “Anti-Goldilocks” under-performance amplified by sharper oil surge, India added to US Treasury “watch list”; RBI hikes will only partly offset.

• SGD: MAS restoring “slight” S$NEER slope is currently overwhelmed by

USD resurgence; incremental MAS tightening to underpin barring trade risks.

• MYR: Election tail risks watched, while a near-term top in oil prices and incipient bond outflow pressures could cap for now

• IDR: Rising US yields pose bond outflow risks, but BI looks ready to defend

with rate hikes

• THB: Easing tailwinds from trade surplus and consecutive months of equity outflows argue for a near-term pause to THB gains

• PHP: Overheating risks continue to weigh, with BSP perceived as falling

behind the curve

• VND: Relative stability on borrowed time as VND NEER jump, risks of FX reserve drawdown and soft spots in exports suggest measured VND downside.

• AUD: RBA hold-back near-term amid higher yields and China-related risks to expose AUD to more downside before capex and ToT catch-up in 2019.

• KRW: Gains underpinned by improving economic outlook and diminished

geopolitical risks amidst denuclearisation talk

• Higher UST yields and oil could trigger further risk re-pricing hitting INR, IDR and PHP, with MYR buffered by oil but watching elections; SGD is a good hedge on MAS; KRW and AUD provide upside later barring trade war.

30 Apr 18 Jun 18 Sep 18 Dec 18 Mar 19 Jun 19

USD/JPY 109 104 102 100 100 100

EUR/USD 1.21 1.23 1.25 1.24 1.24 1.25

USD/CNY 6.33 6.36 6.58 6.44 6.32 6.30

USD/INR 66.4 68.0 69.5 68.2 65.0 64.0

USD/KRW 1067 1060 1090 1040 1020 1010

USD/SGD 1.32 1.34 1.36 1.33 1.32 1.30

USD/IDR 13895 13950 13950 13800 13500 13400

USD/MYR 3.92 4.02 4.12 3.98 3.85 3.72

USD/PHP 51.7 53.3 54.5 52.8 51.0 51.5

USD/THB 31.5 31.4 31.6 31.2 31.0 30.8

USD/VND 22763 22880 23000 22950 22800 22750

AUD/USD 0.76 0.74 0.73 0.76 0.79 0.82

- 2 -

Global FX: USD recalibrates to higher yields US CPI inflation heading higher after one-offs fade out

Sources: CEIC, Mizuho Bank Singapore Treasury

Could rising UST yields prompt a Dollar rebound?


Softening EZ momentum triggers caution in EUR longs


Slowing outflows, but reduced JPY hedging as well

Sources: Reuters, Mizuho Bank Singapore Treasury

• Buoyant oil prices, a solid US equity rebound as well as rising inflation momentum have conspired to drive a jump in 10y UST yield above 3%, shaking the USD from its stupor.

• With US core PCE and wage inflation both tracking to recent highs, the Fed also looks certain to maintain its path of gradual tightening, with the market forced to price in more rate hikes than previously expected.

• At the same time, softer Eurozone momentum and diminished inflation pressures in Japan argue against prospects of convergence by ECB and BoJ just yet, which led to some cautious paring of USD shorts, in turn buoying the USD.

• That said, the downturn in European momentum might be due to a particularly harsh winter this year, and the EUR could benefit from a spring rebound, if activity does indeed recover from weather disruptions.

• Meanwhile, the JPY has witnessed seasonal softness with the start of the Japanese financial year, especially after reports that Japanese insurers are planning to make unhedged purchases of foreign assets this year.

• That said, Japanese portfolio outflows have been easing since mid-2017, which could help to anchor the JPY against excessive weakness as well.

• If UST yields were to stay relatively contained, we expect a period of USD consolidation rather than outright gains, with EUR and JPY likely to find a stronger footing after seasonal factors fade out.

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Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Dec 17

US - PCE and Wage Inflation (3m/3m saar, %)

Core CPI 3m/3m saar Core PCE 3m/3m saar

Hourly earnings (rhs, 3m/3m saar)

One-off wireless fees drop

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DXY Index vs UST yield spreads

DXY Index US-DXY 10y spread (rhs, %)

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Apr 14 Oct 14 Apr 15 Oct 15 Apr 16 Oct 16 Apr 17 Oct 17 Apr 18

Eurozone - Sentiment indicators

Markit Manufacturing PMI Consumer confidence (rhs)

100

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Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18

USD mn

Japanese portfolio outflows have been slowing since mid-2017

Resident Pf Outflows (USD bn, 4-week avg) USD/JPY (rhs)

- 3 -

AXJ: Risk Re-pricing!

• In our Feb edition we warned that “re-coupling of UST yields and USD might trigger

a bout of sell-off in AXJ (EM Asia FX)”; especially if hardening in UST yields gather pace. And that has played out to some part with UST yields surging past 3%.

• But perhaps not all the risks have surfaced as EM Asia yield surge merely (and mostly) parallels UST yields. Whereas, typically it is the abrupt surge in risk-premium (in excess of UST yield moves) that corresponds to sharper AXJ sell-off.

• On the global front, the confluence of lingering US-Sino retaliatory trade tariff risks , higher oil prices, (US) policy tightening overtaking global recovery may accentuate and/or hasten “risk premium” being priced into EM Asia, denting currencies.

• In particular, Fed’s B/S reduction alongside ECB taper may exert “liquidity squeeze” (global liquidity is set to contract for the first time in a decade) compounding risk re-pricing ; recent surge in Asia’s high-yield corporate bond yields reveal these nascent risks.

• If so, weakness in AXJ is set to be pervasive (even if temporary) ; with differentiation determined by “twin deficit”, oil and policy/credit vulnerabilities.

• Inter-play between “twin deficits” and oil expose INR, PHP and IDR to stress as drag higher oil imports spill-over as fiscal dent and/or inflationary impact.

• And BI’s feet dragging feet on tightening despite fiscal transfers to dampen inflation compounds IDR risks while PHP may find relief if BSP hikes. RBA relegating hawks unsettles AUD but ToT/investments boost further out may buoy later. And even if RBI hikes in H2, INR may not be absolved of wider twin deficit, policy and banking risks.

• US-China trade risks expose KRW and SGD to soft patches. Whereas MYR is best placed to out-perform (relatively) if oil boost persists; barring elections tail risk. Upshot: “Risk re-pricing” may initially be pervasive before fading on later on convergence.

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Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18

Asia FX are Dented in Recent Weeks as 10Y UST Yields Test 3%; Not Seen Since Start-2014 ; after

Taper Tantrums! (Index=100 Oct-2017)

CNY INRPHP IDRSGD KRWAUD MYRJPY EURTHB 10Y UST Yields (RHS, Inverted Scale)

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Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18

Higher UST Yields correlated with weaker FX (stronger USD) - evident post-Trump - "Re-Coupling"?(% Chg vs. USD sinice 7-Nov-2016)

GBP Gold AUD CAD JPY EUR 10Y UST Yields (RHS, Inverted Scale)

65 68

48

81

34

7

30

-400

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UST Indon Philippines India Malaysia China Korea Singapore

Short-end Yield Surge Asia is not materially above US; suggesting that

addditional risk premium have not been factored in. (3Y Yield Chg; bps)

YTD (till 26 Apr; bps; LHS) Since End-Mar 2018 (till 26 Apr, bps; LHS)

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Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18

Recent UST yield "squeeze" is not "worse case scenario", given that Indon-Malaysia composite

move merely followed UST yield moves; unlike the 2013 "taper tantrum" surge in "risk spread" - a

proxy of risk premium. (MoM Yield Chg, smoothed, bps, LHS)

"Risk Spread" Normalized^ (Smoothed, 10dma) UST 10Y Indon-Malaysia Composite

^ The normalized "risk spread", a gauge of risk pre mium re-pricing, takes the spread between average Malaysia-Indonesia and UST yields (in bps) and "no rmalizes" this over the average prevailing 10Y UST yield.

"Risk spread" widening out suggests risk re-pricin g during "taper tantrums" in 2013 ; during the "China shock" in 2015 ; and againi during "Trump-flation" in late 2016 . Not yet evident this time!

- 4 -

CNY: Not a Weapon of Trade (War)

• The misconception that Beijing will wield CNY (devaluation) as a weapon in the trade spat with the US rings hollow and misguided on two counts.

• First, even if Beijing were to seriously consider CNY as an option – which we seriously doubt – for trade retaliation, it will recognize the ineffectiveness of CNY devaluation in attaining its ultimate objective of protecting exporters.

• Fact is, price (of CNY) elasticity of (demand for) China’s exports has diminished

considerably. Simply put, since global exports demand collapsed in 2012, cheaper (trade-weighted) CNY has not discernibly boosted exports; mainly due to China’s move up the value chain which renders exports less price sensitive

• Second, for overarching objectives such as CNY internationalization, and macro-

stability (including preventing destabilizing capital flight) stable (or slightly stronger) CNY is a critical prerequisite. Simply because the cost of back-stopping de-stabilization “after is prohibitively high – as the 2015 “China shock” revealed.

• To be sure, if US-China trade risks escalate into spiralling tit-for-tat tariffs, initial

CNY sell-off may be hard to avoid. But the impact may ironically be more pronounced for AUD, KRW, TWD and SGD – China’s key trading partners/suppliers.

• Upshot: CNY could ironically provide intra-Asia hedge insofar that trade war risks

impact across EM Asia (and less so directly in CNY given stable NEER buffer). In any case, near-term risks are skewed to the upside for USD/CNY with 6.60 as initial barrier (ahead of 6.80), before capitulating back to sub-6.30 levels into mid-2019.

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7.10Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

Revocation of "Counter-cyclical" was only temporarily mistaken as CNY weakening

signal; instead more market and trade-weighted FX moves are recognised.

USD/CNY Lower Band Upper Band

USD CNY Fix USD/CNH

Sources: Reuters, Mizuho Bank

Stronger CNY 11-Aug: 1.9% reference devaluation followed by a few sessions of self-reinforcing sell-off as fixing shifted to market-based mechanism. CNY sell-off quelled by PBoC intervention/clarification

Introduction of "counter-cyclical" factor for USD/CNY fixing.

Revocation of "counter-cyclical" factor .

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5005 06 07 08 09 10 11 12 13 14 15 16 17 18

Exports elastcity to CNY NEER shifts (with 4-6mth lag) has dulled since

2014 as China moves up the value chain (less price sensitive) ...

Exports (YoY 3mma, LHS, Inverted)

CNY NEER (6M avg MoM Chg; 4mths lead; RHS) Sources: CEIC, Mizuho Bank80

85

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105

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Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

Stable CNY NEER is the defualt stance, though modest appreciation bias is

less harmful than sharp falls, which could induce even sharper sell-off

(instability) amid reflexivity risks ! (Index end-2014=100)

CNY NEER

USD (DXY) index (RHS; rebased: Start-2008 = 100)

60 per. Mov. Avg. (CNY NEER)

Counter-cyclical Factor for CNY Fix initiated

Paradigm shift from "dirty" USD peg to NEER-based

Stabilization helped by capital curbs alongside couner-cylcical FX fixing .

- 5 -

INR: Anti-Goldilocks Accentuated

• We flagged INR under-performance risks in Q3 2017; on account of; i) widening twin deficits; ii) rising inflation and; iii) political/policy risks – the “three bears” of “Anti-Goldilocks” . Since then, our conviction has grown as the risks have amplified.

• For one, by an even sharper pick-up in oil prices (Brent ~ $75 from US$50-55 in Q1

2017); which is a particularly pernicious source of potential INR weakness.

• Rising oil prices simultaneously heighten risks of; i) “long-memory” inflation pass-through and significantly wider “twin deficits”; C/A deterioration on higher oil imports and fiscal slippage from efforts to blunt oil price impact (e.g. lower excise duties).

• C/A deficit threatening to blow out to 2.5-3.0% (2016-17: ~1.0%), 3.3% budget target

jeopardized (fuelling debt financing woes) and higher inflation conspire to erode real returns; accentuating weaker INR amid risk re-pricing from higher UST yields.

• What's more, insofar that banking scandals cast a shadow on the recapitalization plan,

reviving credit growth as well as inspiring foreign capital infusion could also remain challenged; at least at current valuations. Again, this is not particularly INR positive.

• Finally, India named in the US Treasury Report Watch list, while of no immediate

negative impact, nevertheless suggests that the US might be tougher in future bi-lateral trade talks. This impedes future “J-curve” benefit from a weaker INR.

• The confluence buoyant oil, rising UST yields, domestic political sensitivities amid

banking scandals and international trade fraught with protectionist risk hitting close to home could see USD/INR testing 69 near-term if risks play out; with recourse to 63-64 into 2019 if post-elections growth- and reform-focus resume.

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07 08 09 10 11 12 13 14 15 16 17 18

RBI has built up FX reserves; far stronger position than during 2013 "taper tantrum" underpinning stab ility; but eroding imports cover at the margin squares with IN R under-performance . (USD bn)

FX Reserves (LHS) Gold (LHS) Others (LHS) Imports cover (months of imports FX Reserves cover, RHS, ratio)

Sources: CEIC, Mizuho Bank

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06 07 08 09 10 11 12 13 14 15 16 17 18

Strong FX reserve buffer despite dip squares with m oderation in INR REER strength - underperforming other Asia FX - but not a collapse; (likely averting sharp plunge - ala 2013 "taper tantrum").

INR REER (LHS; 2010=100) Imports cover (months of imports FX Reserves cover, RHS, ratio)Sources: BIS, CEIC, Mizuho Bank

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5

Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18

India: Erosion in real rates amid inflation jump, growth undershoot, twin deficts & politics risks,

suggest pressures on INR assets; banking sector risks re-emerge on scandals

Real Yields (10Y GOI) Real Spread (10Y GOI-UST) SENSEX (4Wkma, RHS)

Bank Recap plan boost.

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Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18

Real interest rates remain positive; and not significantly below the RBI's 1.5-2.0% range; but

fiscal slippage risks and upside to inflation change the policy calculus. (%)

RBI Policy (Repo) Rate

Real Interest Rate (RHS, %)

Real "Core" Interest Rate (RHS, %)Sources: CEIC, Mizuho Bank

20

30

40

50

60

70(16)

(14)

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(8)

(6)

(4)

(2)Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18

With buoyant Oil prices, the overall trade deficit set to be underpinned , and enhanced by consumer electronics is likely to prompt wider C/A deficit

(3mma US$bn)

Trade DeficitIndia Crude Oil Basket (US$/bbl, 3mma; RHS)Sources: CEIC; Mizuho Bank

0

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4

6

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06 07 08 09 10 11 12 13 14 15 16 17 18

But for now, "financing buffer" from capital account (inflows) buys some INR

resilience; though surge in C/A deficit is a concern. (4Qma, % of GDP)

C/A Deficit (% of GDP)

Capital Inflows (% of GDP)

Capital Account (Surplus) to C/A (deficit) remains positive for INR -capital inflows comfortably finance the C/A gap - but boost is set to moderate as C/A deficit re-widens

Table 1: US Treasury Report & "Currency Manipulator" Criteria

1

2

3

Trade Surplus C/A Intervention

1 China Guilty Not Guilty Guilty

2 Japan Guilty Guilty Not Guilty

3 Korea Guilty Guilty (reduced) Guilty (reduced)

4 Germany Guilty Guilty Not Guilty

5 Switzerland Not Guilty Guilty Guilty

6 India Guilty Not Guilty Guilty

US Treasury Conditions to be Named Currency Manipulator

Trade surplus vs. U.S. is more than US$20bn

C/A surplus exceeds 3% of GDP

Persistent currency intervention (FX reserve build-up >2% of GDP)

April 2018 Treasury Report: "Monitoring List"

US Trade Deficit

US$ bn US$ bn US$ bn US$ bn US$ bn US$ bn US$ bn

Total China Japan Korea Taiwan India ASEAN-6

2005 828.2 211.0 86.5 17.9 24.2 11.9 51.5

2010 690.6 269.0 63.0 11.7 12.6 11.5 39.4

2017 797.1 342.8 68.8 22.9 -16.7 22.9 89.4

*Mizuho Chart Speak – “India’s Cyclical Soft Patch to Impede Rupee Bulls”, 29 Sep 2017

- 6 -

SGD: Calibrated Slope Does Not Defy Dollar

• As we expected, the MAS reinstated calibrated S$NEER appreciation bias with a “slight” S$NEER slope). But as we warned, this has not triggered fresh SGD strength.

• In fact, ironically, SGD has fallen ~1.5-2% since, though not because of, MAS slope

restoration. Instead, SGD drop is mostly driven by USD squeeze amid rising UST yields.

• With bullish USD turn catalysed by higher yields, rising US inflation, and simmering US-China trade tensions, near-term SGD risks are tilted to the downside; especially if it coincides with softer EUR dragged by recent activity slowdown and “Brexit” uncertainty.

• In fact, quite tellingly, recent (albeit modest) slippage in S$NEER from +70-80bps

(with respect to policy mid-point) to +40-60bps suggests some concession for exports deceleration and downside risks to the global economy.

• To be sure, the MAS continues to subscribe to a base case of continued growth, even

if moderated – as the electronics demand surge peaks – that is consistent with further calibrated slope increments in coming policy meetings.

• What this means is that to the extent that worst-case outcomes in global trade are

averted, and Singapore’s growth continues to broaden to services, more emphatic S$NEER upward bias will gradually be phased in (~ next 18-30 months).

• Especially if oil hastens cost-push inflation restoration and tightens wage-price

transmission. But pipeline policy normalization (via steeper S$NEER) slope must not be confused for imminent USD/SGD fall as S$NEER slope does not defy the USD.

Instead, we expect USD/SGD tests towards 1.36-1.37 in 3-6 months if UST yield squeeze and risk re-pricing intensify; before moderation back below 1.33 into 2019.

+8.4%, -2.2%-pt post-MAS

+1.8%, -0.4%-pt post-MAS

-9.6%, +2.4%-pt post-MAS

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Post-MAS SGD drop mostly driven by USD index rise ; and to a small extent by S$NEER slip though still at the upper half of ba nds (+40-50bps)

SGD (LHS, % Chg vs. USD since end-2016)

S$NEER (LHS, % Chg since end-2016)

Dollar Index (RHS, Inverted; % Chg since end-2016)

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1.46Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18

UST yield surge & consequent USD strength have shif ted S$NEER bands; lifting USD/SGD range corresponding to S$NEER policy bands ~ with mid-point around 1.34

(based on Mizuho estimates)

SGD (Actual) SGD (Mid Pt)

Sources: Bloomberg, CEIC, Mizuho Bank

Stronger SGD

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Singapore's Exports Demand by Region: Moderating Buoyancy amid deceleration in EM Asia

demand; this should temper SGD strength for now (% Yoy 3M Avg) ...

NODX

Malaysia, Indonesia & Thailand

Korea, Taiwan & Japan

China incl HK

US & EU

Sources: Bloomberg, CEIC, Mizuho Bank

Stronger SGD

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Singapore's Industrial Output: Sharp electronics de celeration dampes manufacturing pace suggests moderation. But consistent with incremental MAS tightening ; barring global trade shocks . (% YoY 6mma)

Industrial Production (IP) IP ex-Biomed

Tpt Eng. Petrochem

Electronics Pharma

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Services inflation squares with bottoming in wage i nflation; but is short of sharp wage-price spiral risks for now as oil is watched.

CPI Services quarterly, YoY (LHS)

Wages 4Qma YoY (RHS)


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Headline CPI is understated but "core" and service s inflation validate policy response;, pace of inflation restoration allows for calibrated slope restoration.

CPI CPI ex-OOA* CPI ex-accom CPI Services ex-accommodation MAS Core

* CPI ex-OOA: CPI ex owner-occupied accommodation imputed rental.

- 7 -

MYR: Electoral tensions stirring below surface MYR election outcomes correlate to BN’s vote margin


Oil prices look extended and could reverse on geopolitics


USD/MYR looks cheap relative to model values


Outflow risks linger even as foreign positioning has fallen


• Malaysia will hold elections on 9 May 2018. A BN victory is expected, with the MYR likely to rally post-elections if BN succeeds in clinching a two-third majority of seats in the lower house.

• However, risks of an upset are also higher than usual, given an undercurrent of dissatisfaction among Malay voters. We see tail risks of a hung parliament or an opposition victory to be simmering under the calm price action in USD/MYR.

• Beyond politics, surging UST yields may drive a paring in EM bond positions, and associated bond outflows could lift USD/MYR in the interim. Malaysia’s foreign bond positioning remains large, even though the size has shrunk from its 2014 peak.

• Furthermore, the current rally in oil prices is looking somewhat extended, being partially driven by short-term fears that the US might renege on the Iran nuclear deal. Any remission in elevated geopolitical uncertainty could thus guide oil prices lower, diminishing MYR support on the margin.

• Our analysis of rate differentials and the yield curve slope also suggests that USD/MYR is undershooting model valuations, suggesting that further downside traction will be difficult.

• Amidst election tail risks, a spurt in UST yields and a potential topping of oil prices, we expect USD/MYR to stay supported around the 3.90 level in the interim, before easing further out in late 2018.

40%

45%

50%

55%

60%

65%

70%

75%

80%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1995 2008 2013

share, %return, %MYR performance vs Election Outcome

Election week gain (%) 4wk post-election gain (%)

BN Dewan Rakyat Seat Share (%) BN Popular Vote Share (%)

2.80

3.00

3.20

3.40

3.60

3.80

4.00

4.20

4.40

4.60

4.800

20

40

60

80

100

120

140

May 14 Nov 14 May 15 Nov 15 May 16 Nov 16 May 17 Nov 17 May 18

Oil vs USD/MYR

Tapis Oil Price (lhs, USD) USD/MYR (rhs, inverted)

3.50

3.60

3.70

3.80

3.90

4.00

4.10

4.20

4.30

4.40

4.50

Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18

USD/MYR vs Model Value

USD/MYR Fitted +/- std dev

80

100

120

140

160

180

200

220

240

15%

20%

25%

30%

35%

40%

45%

Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Sep 17 Mar 18

USD bnMalaysia - Foreign bond holdings (USD bn)

% of Total Outstanding (rhs) Non-resident holdings of BNM+Govt Bonds/Bills

- 8 -

IDR: BI plays defence Bond outflows have become more sensitive to UST yields


Foreign bond positioning is largest in Indonesia


IDR sell-off correlates with rising UST yields


Narrowing trade surplus diminishes IDR buffers


• The spurt up in UST yields, coupled with a softening in global economic momentum, has chilled EM bond sentiment. Regional bond outflows have resumed again in April, after brief respite for March.

• Given the rising sensitivity of foreign bond flows to US yields, and high foreign bond ownership in the Indonesia bond market, bond outflows have weighed heavily on IDR, resulting in BI moving up its USD/IDR intervention cap towards the 14,000 level.

• IDR is also relatively more vulnerable to its regional peers, with net foreign bond inflows since Jun-2015 standing at $25bn, which is far larger than Malaysia, Thailand and Korea.

• An expansion in infrastructure spending could also lead to greater imports of raw materials, pressuring the currently slim trade balance if export growth is to falter.

• However, we think BI would be keen to weigh against excessive USD/IDR rallies. The Bank has sufficient FX reserves and also the scope to raise rates to support the currency, having already enacted two rate cuts in 2017.

• Commodity prices had been mixed, with coal prices trading back to 2016 highs while palm oil prices have eased since the start of the year. As such, commodity sentiment might prove uneven and provide less of a lift than in 2017.

• Should upward shifts in US yields stay more moderate than excessive, BI could lean against further USD/IDR upside, with the psychological 14000 level proving a key resistance.

0

5

10

15

20

25

30

35

40

45

Feb 15 Aug 15 Feb 16 Aug 16 Feb 17 Aug 17 Feb 18

USD mn

ASEAN: Expected Foreign Bond Outflow for every 1bps rise in UST 10y yield

Indonesia Malaysia Thailand

*Betas from 5Y rolling regressions

**No statistical significance for PH

-20,000

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18

Emerging Asia - Cumulative Foreign Bond Inflows since Jun 2015 (USD mn)

Indonesia Malaysia Thailand Korea

-80

-60

-40

-20

0

20

40

60

80-5

-4

-3

-2

-1

0

1

2

3

4

5

Jan 18 Feb 18 Mar 18 Apr 18 May 18

bps%ASEAN FX gains vs US yields (% ytd)

IDR MYR THB US 10y ytd (bps, rhs, inv)

$3.9bn of bond outflows (ID/MY//TH) in Feb

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-80

-60

-40

-20

0

20

40

60

80

Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Sep 17 Mar 18

% of GDP3m/3mIndonesia - Trade Developments

Trade Bal sa (rhs, 3m ann, % of GDP)Exports 3m/3m saarImports 3m/3m saar

- 9 -

THB: Seasonally soft Customs trade surplus has slipped on higher imports


Tourism activity continues to pick up strongly


Rate spread is approaching highest level since 2007


Foreign equity outflows continues unabated


• The THB was not spared amidst a sharp rise in USD/AXJ as UST yields jumped, leading to a rise in foreign bond outflows from the region. Still, the rise in USD/THB has been relatively contained, given the lower level of foreign bond ownership.

• Going into May, the THB may also face additional seasonal weakness due to dividend outflows, although the effect should ease off going into June.

• One developing concern is that tailwinds from the trade surplus have dwindled in Q1. Imports of raw materials are picking with infrastructure spending likely to accelerate ahead of elections, which are scheduled for Feb 2019.

• That said, the services balance should provide some buffers to the softer goods balance. Tourist arrivals have been growing at double digits since late last year, as the Kingdom finally moved past a year of mourning and shifts back to a vibrant mode.

• Capital flows will still be the key driver to watch. Given that the 5Y US-TH yield differential has widened to its highest since 2007, and with BoT not inclined to hike rates, we see risks of USD/THB converging up amidst a further rise in US rates.

• Foreign equity outflows have also been persistent since the start of 2018, which could pose hurdles for THB in the near-term, although we expect Thailand’s strengthening growth profile to eventually attract investor interest again.

• Given renewed downside risks from portfolio and dividend outflows, USD/THB may hover around the mid-31 levels, before eventually easing on the back of an expected strong growth outturn in 2H.

-40

-30

-20

-10

0

10

20

30

40

-30

-20

-10

0

10

20

30

Sep 14 Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Sep 17 Mar 18

USD bn% Thailand - Customs Trade

Trade Bal (rhs, 3m saar) Exports q/q saar Imports q/q saar

58

60

62

64

66

68

70

-10

-5

0

5

10

15

20

Feb 16 May 16 Aug 16 Nov 16 Feb 17 May 17 Aug 17 Nov 17 Feb 18

%% y/yThailand - Tourist arrivals and

Hotel Occupancy

Tourist arrivals (y/y, 3mma)

Accomodation Occupancy Rate (rhs, % 12ma)

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

25

30

35

40

45

50

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

USD/THB vs US-TH 5y rate differential

USD/THB US-TH 5y rate diff (rhs, %)

30.0

31.0

32.0

33.0

34.0

35.0

36.0

37.0

38.0-25

-20

-15

-10

-5

0

5

10

15

20

25

May 16 Aug 16 Nov 16 Feb 17 May 17 Aug 17 Nov 17 Feb 18 May 18

Thailand - USD/THB vs Foreign Equity Inflows

Foreign equity inflows (20dma, ann.) USD/THB (rhs, inverted)

- 10 -

PHP: Overheating to weigh Remittances rebound has cushioned PHP decline


Overheating concerns must be assuaged to stem outflows

Sources: Reuters, Mizuho Bank Singapore Treasury FDI growth continues despite concerns over Drug War


Capital goods and raw materials imports grow


• PHP’s decline since 2016 has been driven by significantly large resident outflows. This is partially due to financial liberalization, but is also reflective of overheating concerns, especially with inflation rising to the top end of BSP’s target band of late.

• Fortuitously, a cheaper PHP may have catalysed a rebound in remittance growth in Q1, which is helping to buffer sharp PHP losses seen in Feb.

• BSP is also stepping up its rhetoric to dampen inflation expectations, with Governor

Espenilla stating that the Bank is exploring various measures and has also allowed a rise in term deposit rates to cap inflation. This sets the stage for a BSP rate hike to come through in May, we think.

• We think the jury is still out on whether overheating concerns can be quelled, and would

stay cautious on the PHP in the interim. Rising infrastructure spending also suggests that imports of raw materials could expand, weighing further on the trade deficit.

• The good news is that FDI is growing robustly, and is financing greater imports of capital goods necessary for development and growth. Indeed, it appears foreign investment sentiment has not been too adversely affected by the War on Drugs, despite the many Western misgivings about it.

• Given prospects of a pick-up of inflation and widening of the trade deficit, we see

further PHP weakness in the interim, especially if BSP is perceived to be behind the curve. An eventual move towards policy tightening could allow PHP to recoup losses, allowing USD/PHP to ease towards 51 by Q1 2019.

-4

-2

0

2

4

6

8

10

Feb 16 Aug 16 Feb 17 Aug 17 Feb 18

Philippines - Remittances Growth (y/y 3mma)

Ex-USA USA Overseas Remittances (y/y, 3mma)

-10

-5

0

5

10

15

Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Dec 17

USD bn,

4q sum PH - Resident outflows have picked up amidst

liberalisation and overheating concerns

C/A FDI Portfolio Others (Non-residents) Others (Residents)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

07 08 09 10 11 12 13 14 15 16 17 18

Philippines - FDI (USD bn, 12m sum)

-20

-10

0

10

20

30

40

Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18

Philippines - Imports (y/y 3mma)

Capital Goods Raw Materials

Mineral Fuel Durable Consumer

Non Durable Consumer Others

Imports y/y 3mma

- 11 -

VND: Lower-Beta Slippage?

• USD/VND has been bumped up a tad since March, alongside broad-based USD squeeze; and “lower beta” VND slippage is revealed in in VND NEER surge compared to CNY NEER (amid broad-based USD squeeze).

• Lower beta VND slippage amid USD strength recently is the flip side of USD/VND stability during USD fall for most of 2017, which had corresponded to falling VND NEER (in contrast to rising CNY NEER then).

• The stark difference though is that maintaining (USD/)VND stability when USD is falling entails FX reserve building, whereas VND stability amid USD resurgence requires FX reserve depletion. And this is deemed to be too high a cost.

• Despite a fairly strong trade surplus (accretive to C/A position) and record capital inflows further boosting overall FX reserves, the SBV may hesitate to deplete FX reserves given that imports cover of just 2.5X pales in comparison to 6-8X in ASEAN.

• More importantly, the recent drop in electronics exports is be a particular worry amid US-China trade war risks threatening to involve a host of collateral casualties.

• Thus, the SBV may have to trade-off stable VND, which mitigates business/investment uncertainty, and VND flexibility consistent with market based1 VND fixing .

• And this might translate into lower beta VND slippage on further USD strength, while VND NEER is gently buoyed (as other basket currencies fall more).

• USD/VND to test 23,000 near-term before consolidating back down ~ 22,700-800 in 2019; but one-off devaluation risks if USD and UST yield squeeze turn out more extreme.

1 The SBV has indicated that the “market based” reference rate will be based against eight currencies – USD, EUR, CNY, JPY, TWD, KRW, THB and SGD – which account for 70-80% of Vietnam’s exports/imports.

94

96

98

100

102

104

106

108

110

75

80

85

90

95

100

105

110

11 12 13 14 15 16 17 18

VND NEER sharp surge vs. CNY NEER; reflects lower "beta"

USD/VND reaction to broad-based USD squeeze.

CNY NEER (LHS, Avg 2014 = 100)

VND NEER (RHS, Start 2012=100)

On a trade-weighted basis, VND volatility is mostly within +/-2% range; and not inconsistent with 2014-2015 valuations.

VND NEER calculated using USD, EUR, JPY, CNY, KRW, TWD, SGD, & THB 20,500

21,000

21,500

22,000

22,500

23,000

23,500

20,500

21,000

21,500

22,000

22,500

23,000

23,500

Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18

Steady VND (vs. USD) is convenient on two counts: i ) increases predictability and forecasting for investments, and; ii) enhances exports competitiveness

withoput stoaking devaluation fears.

VND (Monthly Avg) SBV Reference Rate

Sources: CEIC, Reuters Mizuho Bank

Weaker VND

Three episodes of 1% devluation each in 2015:1) Jan (7th) from 21,246 to 21,458; 2) May (7th) to 21,673; 3) Aug (19) to 21,890

Annual devaluation of 1% each in Jun 2013 and Jun 2014.

12 Aug 2015: USD/VND trading bands doubled to +/-2% from +/-1%19 Aug 2015: USD/VND trading bands widened (again!) to +/-3%. And VND mid-point devlaued 1% to 21,890.

(4)

(2)

0

2

4

6

8

10

12

14

16

18

20

(4)

(2)

0

2

4

6

8

10

12

14

16

18

20

06 07 08 09 10 11 12 13 14 15 16 17 18

Net Trade (US$ bn): Exports resurgence in 2017, with some $2.8bn surplu s is positive; and reflects wider manufacturing boost; but recentg exp orts dip led by electronics is worrying.

Trade Balance Exports Imports

2006: -$4.61bn

2007: -$9.97bn

2008: -$16.38bn

2009: -$12.38bn

2010: -$12.60bn

2011: -$8.85bn

2012: $0.75bn

2013: $0.07bn

2014: $2.37bn

2016: $1.78bn

2015: -$3.55bn

2017: $2.8bn

(10)

(5)

0

5

10

15

20

25

30

(10)

(5)

0

5

10

15

20

25

30


Electronics & Mobile Devices (such as Phones - think Samsung!) drive Vietnam's Ex ports strength; but recent dip highlights trade war worri es.

Others Veg, Pepper, Nuts & Coffee AquaRice Textiles & Footwear Crude OilPhone & Spare Parts Electronics Total Exports

0

5

10

15

20

25

0

5

10

15

20

25

2010 2011 2012 2013 2014 2015 2016 2017

Strong FDI from Japan & Korea square with electronics/mobile exports/manufacturing ramp-up

Other US Thailand Taiwan China (incl. HK) Singapore Korea Japan Total

(3000)

(2000)

(1000)

0

1000

2000

3000

05 06 07 08 09 10 11 12 13 14 15 16 17 18(3000)

(2000)

(1000)

0

1000

2000

3000While imports cover remain soft at 2.0-2.5X, FX Res erves are likely to be

bolstered by turn in net exports into strong surplu s in 2017 and early-2018 . (US$ mn, 3mma)

FX Reserves Chg Trade BalSources: CEIC, Mizuho Bank

- 12 -

AUD: Catch-up Delayed, Not Derailed

• The “air-pockets” (from rising yields and trade risks) we flagged in our Quarterly (end-Q1) has come through with sub-0.75 breached; and we now highlight risks of 0.73-test coming though with pressures potentially roiling over into Q3.

• To be sure, we have not abandoned our view of more durable AUD ascendancy consistent with 0.82-0.83; but have merely deferred this further out on three counts.

• First, with a still benign Q1 inflation read (and Q2 data release only in late-July) perceptions of the RBA urgency to start normalizing policy have weakened;

• What’s more, full-time employment softening, though not collapsing, echo worries about weak wage gains. Consequently, RBA normalization bets have rescinded further and corresponding, AUD buoyancy from RBA bets is conspicuously absent.

• Needless to say, jobs, wage and inflation hold-back reinforce pre-existing reservations about household debt/mortgage burden amid soft spots in the housing market; all of which cast a shadow on the already beleaguered banking sector.

• Second, lingering fears of trade war risks impacting AUD via China demand (for commodities) channel could also be a reason for AUD to be dampened in the near-term; especially given that high UST yields erode high-beta currency gains.

• Finally, prospects of resurgent USD poses a double whammy via softer commodity prices (from denomination effects) amplify AUD dent.

• Nonetheless, potential for (delayed) AUD “catch-up” is compelling insofar commodity price recovery is not derailed – amid global infrastructure plans – offering both ToT- and capex-driven boost for AUD; reinforced by coincident with RBA normalization .

• As such, we have merely deferred our views for AUD ascendancy to 0.82-0.83 to mid-/late-2019. But meanwhile, with interim air-pockets are set to test 0.73.

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

(15)

(10)

(5)

0

5

10

15

06 07 08 09 10 11 12 13 14 15 16 17 18

While Upturn in Mining Capex Expectation is less pr onounced, it is consistent with AUD above 0.80; especially if commodity buoyancy sustains. AUD dyna mics reflect mining driving wider confidence.

(QoQ; 4Qma)

Mining Capex Expectations (LHS, advanced 3Q) AUD Levels (RHS, 2Qma)Sources: CEIC, Mizuho Bank

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

(6)

(4)

(2)

0

2

4

6

8

06 07 08 09 10 11 12 13 14 15 16 17 18

Overall Capex Expectations Improvement has been sus tained on a trend basis; and this is consistent with AUD gains towards 0.85-0.90 range into late-20 18. (QoQ; 4Qma)

Total Capex Expectations (LHS, advanced 3Q) AUD Levels (RHS, 2Qma)Sources: CEIC, Mizuho Bank

(2)

(1)

0

1

2

3

4

5

6

(2)

(1)

0

1

2

3

4

5

6

05 06 07 08 09 10 11 12 13 14 15 16 17 18

Australia's CPI, is set to pick up, though benign core pressures buy the RBA some

time before normalizing.; especially with imported price pressures dampened. (%-pt contribution, YoY)

Automotive Fuel H/H Energy Total Housing ex-energy

Tpt-ex Fuel Services Alcohol & Tobacco

Food Inflation ex-Fuel & Energy CPI

(50)

0

50

100

150

200

250

300

350

400

450

(50)

0

50

100

150

200

250

300

350

400

450

08 09 10 11 12 13 14 15 16 17 18

While still strong Full-time jobs will be a watch by the RBA amid sharp turn down; th is should temper near-term AUD boost from RBA hike bet s.

FT Emp. Chg. (000's; 12m sum; LHS)PT Emp. Chg. (000's; 12m sum LHS)Emp. Chg. (000's; 12m sum; RHS)


0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

05 06 07 08 09 10 11 12 13 14 15 16 17 18

Australia: Weak wages growth not only struggles to meaningfully beat inflation, but is also challenged by heavier debt burden.

Wage Index Mfg Public Sector Private sector Mining

100

120

140

160

180

200

40

60

80

100

120

140

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

As household balance sheet risks are compounded by housing markets risks, higher interest rates; and all amid banks' ratings slip ...

Housing Debt to Disposable Income

Owner Occupied Housng Debt to Disposable Income

Debt to Disposable Income (RHS)

20

40

60

80

100

120

140

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18

Buoyancy in iron ore prices and emphatic bottoming in capex bode well for AUD recovery

further out - barring worst-case "trade war" outcomes .

AUD Iron Ore

Sources: Bloomberg, Mizuho Bank

Despite surging iron ore prices AUD drops sharply on higher UST yields but resumes positive correlation with iron ore in early-2017 albeit remaining subdued.

While higher UST yields and trade war risks could d ampen AUD despite iron ore buoyancy, underlying ToT (from ore prices) and investment (fr om capex) resilience should set the stahe for AUD "catch-up"; so long as trade war risk s do not manifest adversely.

- 13 -

KRW: Peace for our time

Kim-Moon summit proclaims denuclearisation goal

Sources: Mizuho Bank Singapore Treasury

Korean growth rebounds in Q1 on investment pickup

Sources: CEIC, Mizuho Bank Singapore Treasury Exports to all regions have rebounded in Q1 as well


Foreign bond inflows buoyed as geopolitical risks ease


• The recent Kim-Moon summit has stirred hopes that North Korea is willing to agree to denuclearisation, with prospects of a formal peace agreement between North and South Korea now looking more likely than ever.

• Given previous efforts by South Korea at fostering better relations with the North have proved to be false dawns, we think it is prudent to wait for details of any denuclearisation agreement first, although there is some ground to be optimistic.

• Meanwhile, Korea’s economic fundamentals have also improved in tandem with the geopolitical environment. Q1 growth rebounded to 4.4% (q/q saar) on the back of a strong pick-up in investment, as well as increased government expenditure.

• While net exports continue to be a drag on growth, exports have actually expanded robustly in Q1, with demand from Europe and Asia showing an especially vigorous rebound. The successful renegotiation of the KORUS FTA also implies less uncertainty going forward, in turn bolstering trade-related investment in Korea.

• The improving growth environment and a diminishing geopolitical risk premium should attract stronger foreign equity and bond inflows into Korea. The steady rise in foreign bond holdings in Q1 stand in sharp contrast to the rest of Emerging Asia, which had seen tepid inflows or even large outflows since January this year.

• We thus see scope for USD/KRW to retrace lower in the short-term, although volatility could pick up again in Q3 with a potential ECB taper on tap. A robust growth path is likely to drive USD/KRW back towards the 1020 level by Q1 2019.

-8

-6

-4

-2

0

2

4

6

8

10

Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 Mar 18

Korea - GDP q/q saar

Consumption Govt Investment

Stocks Net Exports GDP q/q saar

-40

-20

0

20

40

Mar

15

Jun

15

Sep

15

Dec

15

Mar

16

Jun

16

Sep

16

Dec

16

Mar

17

Jun

17

Sep

17

Dec

17

Mar

18

Korea - Exports by Country (q/q saar)

China Japan USA

Asia ex-China/Japan Europe Others

Exports (q/q saar)

10%

12%

14%

16%

18%

60

70

80

90

100

110

Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Sep 17 Mar 18

USD bnKorea - Non-resident holdings of Govt debt

Foreign-owned Govt bonds and MSBs % of total outstanding (rhs)

- 14 -

FX Positioning & Flows Figure 1. Non-commercial longs in EUR

Sources: CFTC, Bloomberg, Mizuho Bank Singapore Treasury

Figure 2. Non-commercial longs in JPY


Figure 3. Non-commercial longs in AUD


Figure 4. Non-commercial longs in USD


Figure 5. India - Foreign equity inflows

Sources: SEBI, Bloomberg, Mizuho Bank Singapore Treasury

Figure 6. Indonesia - Foreign equity inflows

Sources: JSE, Bloomberg, Mizuho Bank Singapore Treasury

Figure 7. Thailand - Foreign equity inflows

Sources: SET, Bloomberg, Mizuho Bank Singapore Treasury

Figure 8. Korea - Foreign equity inflows

Sources: Korea Exchange, Bloomberg, Mizuho Bank Singapore Treasury

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

-25

-20

-15

-10

-5

0

5

10

15

20

25


Net EUR CFTC non-commercial positions

Net EUR Non-commercial Positions (USD bn) EUR/USD (rhs)

Sources: Reuters, Mizuho Bank Asia & Oceania Treasury

100

102

104

106

108

110

112

114

116

118

120-20

-15

-10

-5

0

5

10


Net JPY CFTC non-commercial positions

Net JPY Non-commercial Positions (USD bn) USD/JPY (rhs, inv)

0.66

0.68

0.70

0.72

0.74

0.76

0.78

0.80

0.82

-2

-1

0

1

2

3

4

5

6

7


Net AUD CFTC non-commercial positions

Net AUD Non-commercial Positions (USD bn) AUD/USD (rhs)

86

88

90

92

94

96

98

100

102

104

106

-40

-30

-20

-10

0

10

20

30

40


Net USD CFTC non-commercial positions

Net USD Non-commercial Positions (USD bn) DXY index (rhs)

56

58

60

62

64

66

68

70-60

-40

-20

0

20

40

60

80


India - USD/INR vs Foreign Equity Inflows

Foreign equity inflows (20dma, ann.) USD/INR (rhs, inverted)

11000

11500

12000

12500

13000

13500

14000

14500

15000-20

-15

-10

-5

0

5

10

15

20


Indonesia - USD/IDR vs Foreign Equity Inflows

Foreign equity inflows (20dma, ann.) USD/IDR (rhs, inverted)

30.0

31.0

32.0

33.0

34.0

35.0

36.0

37.0

38.0-25

-20

-15

-10

-5

0

5

10

15

20

25


Thailand - USD/THB vs Foreign Equity Inflows

Foreign equity inflows (20dma, ann.) USD/THB (rhs, inverted)

1000

1050

1100

1150

1200

1250-90

-60

-30

0

30

60

90


US

D b

n

Korea - USD/KRW vs Foreign Equity Inflows

Foreign equity inflows (20dma, ann.) USD/KRW (rhs, inverted)

- 15 -

Currency Forecast Ranges USD Crosses

JPY Crosses

FX Forecasts Jun 18 Sep 18 Dec 18 Mar 19 Jun 19

USD/JPY102 - 108

(104)

100 - 107

(102)98 - 106 (100) 98 - 106 (100) 96 - 105 (100)

EUR/USD1.20 - 1.26

(1.23)

1.20 - 1.27

(1.25)

1.21 - 1.28

(1.24)

1.21 - 1.28

(1.24)

1.22 - 1.28

(1.25)

USD/CNY6.48 - 6.48

(6.36)

6.36 - 6.71

(6.58)

6.32 - 6.58

(6.44)

6.20 - 6.44

(6.32)

6.18 - 6.42

(6.30)

USD/INR64.9 - 69.6

(68.0)

67.9 - 71.1

(69.5)

66.6 - 69.8

(68.2)

63.5 - 68.2

(65.0)

62.5 - 65.5

(64.0)

USD/KRW1020 - 1100

(1060)

1050 - 1130

(1090)

1000 - 1090

(1040)

980 - 1060

(1020)

970 - 1050

(1010)

USD/SGD1.31 - 1.37

(1.34)

1.33 - 1.39

(1.36)

1.30 - 1.36

(1.33)

1.29 - 1.35

(1.32)

1.27 - 1.33

(1.30)

USD/IDR13600 - 14300

(13950)

13600 - 14300

(13950)

13400 - 14200

(13800)

13100 - 13900

(13500)

13000 - 13800

(13400)

USD/MYR3.86 - 4.15

(4.02)

3.98 - 4.26

(4.12)

3.85 - 4.12

(3.98)

3.72 - 3.98

(3.85)

3.60 - 3.85

(3.72)

USD/PHP51.6 - 54.5

(53.3)

53.3 - 55.7

(54.5)

51.6 - 54.5

(52.8)

49.9 - 52.8

(51.0)

50.4 - 52.6

(51.5)

USD/THB30.8 - 32.0

(31.4)

31.0 - 32.2

(31.6)

30.6 - 31.8

(31.2)

30.4 - 31.6

(31.0)

30.2 - 31.4

(30.8)

USD/VND22700 - 23100

(22880)

22800 - 23200

(23000)

22700 - 23200

(22950)

22600 - 23000

(22800)

22500 - 23000

(22750)

AUD/USD0.71 - 0.78

(0.74)

0.70 - 0.76

(0.73)

0.73 - 0.79

(0.76)

0.76 - 0.82

(0.79)

0.79 - 0.85

(0.82)

Jun 18 Sep 18 Dec 18 Mar 19 Jun 19

USD/JPY102 - 108

(104)

100 - 107

(102)98 - 106 (100) 98 - 106 (100) 96 - 105 (100)

EUR/JPY126 - 135

(128)

123 - 132

(128)

120 - 130

(124)

120 - 130

(124)

118 - 128

(125)

JPY/CNY648.00 - 6.31

(327.15)

6.12 - 6.65

(6.38)

6.24 - 6.64

(6.44)

6.12 - 6.52

(6.32)

6.10 - 6.50

(6.30)

JPY/INR0.604 - 0.679

(0.654)

0.654 - 0.707

(0.681)

0.656 - 0.708

(0.682)

0.625 - 0.682

(0.650)

0.616 - 0.664

(0.640)

JPY/KRW9.72 - 10.66

(10.19)

10.19 - 11.18

(10.69)

9.92 - 10.88

(10.40)

9.73 - 10.67

(10.20)

9.63 - 10.57

(10.10)

JPY/SGD1.21 - 1.33

(1.27)

1.29 - 1.37

(1.33)

1.29 - 1.37

(1.33)

1.28 - 1.36

(1.32)

1.26 - 1.34

(1.30)

JPY/IDR127 - 139

(133)

132 - 142

(137)

133 - 143

(138)

130 - 140

(135)

129 - 139

(134)

JPY/MYR3.57 - 4.03

(3.80)

3.87 - 4.21

(4.04)

3.81 - 4.15

(3.98)

3.69 - 4.01

(3.85)

3.56 - 3.88

(3.72)

JPY/PHP0.47 - 0.53

(0.50)

0.51 - 0.56

(0.53)

0.51 - 0.55

(0.53)

0.49 - 0.53

(0.51)

0.50 - 0.53

(0.52)

JPY/THB0.29 - 0.31

(0.30)

0.30 - 0.32

(0.31)

0.30 - 0.32

(0.31)

0.30 - 0.32

(0.31)

0.30 - 0.32

(0.31)

JPY/VND208 - 228

(218)

218 - 233

(225)

221 - 238

(230)

220 - 236

(228)

220 - 235

(228)

AUD/JPY73 - 83

(78)

71 - 78

(74)

73 - 79

(76)

75 - 83

(79)

78 - 86

(82)

Sources： Reuters, Mizuho Bank Singapore Treasury Division forecasts

- 16 -

Growth & Inflation Tables Key Economic Forecasts

Central Bank Policy Outlook

FX Deposit and Forward-Implied Rates

GDP Growth

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

China 7.3 6.8 6.7 6.5 6.6 6.6 6.7 6.8 6.7 6.7 6.6 6.7

India 6.9 6.3 7.1 7.3 7.2 7.3 7.5 7.6 7.3 7.7 7.2 7.6

Korea 2.8 3.1 2.8 3.0 2.5 3.1 3.0 2.9 3.2 2.8 2.9 3.0

Singapore 3.3 3.6 3.7 3.2 2.7 3.1 3.3 4.0 2.9 2.8 3.2 3.3

Malaysia 5.1 5.9 5.3 5.4 5.1 5.2 5.1 4.9 5.1 5.0 5.3 5.0

Indonesia 5.3 5.1 5.1 5.2 5.3 5.2 5.0 5.2 5.2 5.3 5.2 5.2

Thailand 3.5 3.9 3.9 3.8 3.6 4.0 3.8 3.9 4.1 3.7 3.8 3.9

Phi lippines 6.6 6.7 6.7 6.6 6.4 6.6 6.5 6.7 6.8 6.6 6.6 6.7

Vietnam 5.9 6.8 7.4 7.0 6.1 6.8 7.3 7.6 7.7 7.2 6.8 7.4

Australia 2.8 2.3 2.8 2.8 2.9 2.7 2.8 2.9 2.9 2.8 2.8 2.9

Country

2012-2016

avg 2017

2018

2018

Note: Asia (ex Japan) includes China, India, South Korea, Singapore, Hong Kong, Taiwan,

2019

2019

Central Bank Policy OutlookPolicy Rate

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

China PBoC 1.5 - 3.5 5.49 4.35 1-Yr Lending Rate 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35

India RBI 2.0 - 6.0 7.48 6.00 Repo Rate 6.00 6.00 6.25 6.25 6.25 6.25 6.50 6.50

Korea BoK 1.5 - 2.5 2.20 1.50 Base rate 1.50 1.50 1.50 1.75 1.75 1.75 2.00 2.00

Singapore MAS* 2.0 - 3.0 - Status Quo S$ NEER

Malaysia BNM 3.0 - 4.0 3.00 O/N Policy Rate 3.25 3.25 3.25 3.25 3.50 3.50 3.50 3.50

Indonesia BI^ 2.5 - 4.5 5.52** 4.25 Benchmark Rate 4.25 4.25 4.25 4.50 4.50 4.50 4.75 4.75

Thailand BoT 1.0 - 4.0 2.13 1.50 1-Day repurchase rate 1.50 1.50 1.50 1.50 1.75 1.75 1.75 2.00

Philippines BSP** 2.0 - 4.0 3.00*** 3.00 Reverse repurchase rate 3.00 3.25 3.25 3.50 3.50 3.75 3.75 3.75

Vietnam SBV 2.0 - 6.0 7.73 6.25 Refinancing Rate 6.25 6.25 6.25 6.25 6.25 6.25 6.50 6.50

Australia RBA 2.0 - 3.0 2.55 1.50 O/N Cash Rate 1.50 1.50 1.50 1.75 1.75 1.75 2.00 2.00

** BSP instituted an interest rate corridor for policy in June 2016. The new effective policy rate is the overnight reverse repurchase rate (3.00% on June 3).

Country

Status Quo Status Quo

* The MAS conducts monetary policy via FX. Speci fically it adopts a trade-weighted SGD appreciation at "modest and gradual" (estimated to be 2% per annum) pace as

BI shifted to the 7 Day repurchase rate as the benchmark rate in August 2016. This by default constituted 125 bps reduction from the last policy rate

Central

Bank

Target

Range

2012 -

2016 avg2017 Q4

2018 2019

Reinstate slope; albeit

calibrated "slight"

incline. (~0.5-1.0% p.a) Status Quo

As of Spot

30 Apr 18 Deposit Fwd-Implied Deposit Fwd-Implied Deposit Fwd-Implied

USD 1.95 2.41 2.82

JPY 109 -0.16 -0.55 -0.14 -0.18 -0.05 -0.10

EUR 1.21 -0.42 -0.79 -0.37 -0.46 -0.23 -0.31

AUD 0.76 2.04 1.89 2.19 2.23 2.40 2.46

CNH 6.32 3.95 4.03 4.15 4.08 4.30 4.31

INR 66.4 6.48 12.52 7.10 8.48 7.55 7.35

KRW 1070 1.55 -0.56 1.66 0.52 1.87 1.11

SGD 1.32 1.30 1.19 1.45 1.53 1.85 1.93

IDR 13900 5.73 5.98 5.70 6.75 6.00 6.70

MYR 3.92 3.41 3.30 3.67 3.43 3.85 3.49

PHP 51.7 n/a 3.91 n/a 4.32 n/a 4.98

THB 31.5 1.49 1.49 1.55 1.39 1.91 1.66

*Deposit rate is mid of bid/offer rates **Fwd-implied rates derived from FX forwards and USD deposit rates

3M 1Y1M

Sources：CEIC, Bloomberg, Reuters, International Monetary Fund (IMF), Mizuho Bank Asia & Oceania Treasury Division forecasts

- 17 -

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