The environment of a growth recovery, rising commodity prices and slowly tightening DM central banks has resulted in a strong run for Asian currencies since the start of 4Q17. This is contrary to our earlier expectation that appreciation pressure on Asian FX will fade. Asian FX has historically been closely linked to export growth. Portfolio flows into Asia, which is tied to the improving DM capex cycle that in turn lifts EM exports, have been strengthening.
Strengthening portfolio flows into Asia, as Asian trade growth recovers
Source: IIF, CEIC, Bank of Singapore
We have revised the 12-month USDSGD forecast to 1.29 from 1.35 on heightened prospects of tighter FX policy by the MAS, spillover from stronger MYR and a soggy USD outlook.
Amid higher oil prices, we think the oil-producer MYR can extend its recent outperformance and forecast USDMYR to reach 3.80 in 12 months (prior 4.05). Authorities are also likely to encourage a stronger MYR heading into elections (that must take place by August 2018) given a tight relationship to local confidence. However, pace of MYR appreciation could slow thereafter as Bank Negara needs to rebuild FX reserves and as we expect oil price to come off the boil.
We mark down our 12-month USDCNY forecast to 6.40 (prior 6.80) but we continue to stick with a view of stable-to-mildly weaker RMB versus the USD amidst a controlled slowdown of the Chinese economy. With the CNY at the strongest level versus the CFETS basket since mid-2016, there is probably limited appetite for meaningful additional strength -- which the suspension of the counter-cyclical component used in the China central bank’s daily USDCNY fixing may have signaled. We expect the authorities may relax certain capital control measures, or send a signal via the USDCNY mid-point fixing, or perhaps could even resume accumulating FX reserves to curb RMB outperformance.
Our baseline scenario assumes trade tension will simmer but doesn’t boil over to derail the growing positive consensus on Asian FX. That said, there is plenty of reason for the US administration to focus more on the trade issue this year. The risk is that these trade frictions become more intense this year, as we get results of the various investigations (steel, aluminum, and, importantly, US intellectual property transfers). This risk of CNY underperformance becoming a bigger drag for regional currencies may come into play especially if US-China trade tension heats up.
Sustained higher oil prices fueled by better global growth is not necessarily bad for Asian currencies although INR and PHP are most vulnerable given that India's and Philippines’ current account balance are already negative and will not be helped by higher oil prices.
Asian FX can also cope with moderately higher US yields in the context of robust global growth. However, if US yields rise aggressively driven more by inflation surprises than stronger activity data, this will be far more damaging for Asian currencies, especially for the IDR and to a lesser extent the PHP and MYR, as it could hurt growth expectations and drive portfolio outflows from Asia.Disclaimer applicable to recommendation
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