20151102-DBS_Group-Mid-quarter_FX_review_and_update__Monetary_policy_divergences_intact_16页_1mb

Mid-quarter FX Review and Update Summary

Core Content

This document provides a mid-quarter analysis of foreign exchange (FX) trends and monetary policy implications for various currencies as of 2 November 2015. It highlights the continued impact of monetary policy divergences, particularly between the US and other major economies, on currency valuations. The analysis includes forecasts for different currency pairs and their expected movements over the next quarters, along with key insights on policy shifts and economic conditions.

Main Points

Monetary Policy Divergences

• USD remains supported by the continued divergence in monetary policy between the US and other central banks, especially the ECB and BOJ.
• The Fed delayed its rate hike to 2016 due to dovish statements and global economic concerns.
• The ECB is considering fresh stimulus and may adjust the size, composition, and duration of its quantitative easing (QE) program.
• The BOJ is content with a stable USD/JPY between 116 and 125 and is not pushing for further depreciation.

Currencies Overview

• Asia ex Japan currencies (AXJ) experienced a relief rally in Sep-Oct due to the Fed's delay in rate hikes and the Chinese yuan's stabilization.
• CNY stabilized but is still viewed as overvalued on a real effective exchange rate (REER) basis.
• HKD is expected to remain pegged to the USD, with the HKMA intervening to maintain the convertibility band.
• TWD shows a weaker outlook and is likely to continue its depreciation.
• KRW is expected to follow a more defined and narrower ascending price channel due to its recent correction.
• SGD remains strong due to its policy band and rate differentials.
• MYR has been a weak performer, with a significant depreciation against the USD.
• IDR has shown less volatility, but its outlook is still weak.
• PHP is vulnerable to rate expectations reversing.
• VND remains weak, with limited upside.
• INR is expected to stabilize depreciation.

FX Forecasts

• EUR/USD is expected to return to the lowest quartile of its descending price channel.
• USD/JPY is consolidating around 120 without further BOJ stimulus.
• USD/CNY is expected to continue its uptrend despite a correction.
• USD/HKD is expected to fluctuate within the lower half of its convertibility band.
• USD/TWD is expected to keep rising in an ascending price channel.
• USD/KRW is expected to follow a better-defined and narrower ascending price channel.
• USD/SGD is expected to rise in the upper half of an ascending price channel.
• USD/MyR is expected to consolidate at the highs between 4.15 and 4.45.

Key Information

• The relief rally in currencies was driven by the Fed's delay in rate hikes and the Chinese yuan's stabilization, but it did not last long.
• Monetary policy divergences remain a key driver of USD strength, particularly against Asian currencies.
• The ECB is expected to deliver more stimulus, which may affect EUR/USD and the REER.
• The BOJ is not expected to expand its QQE program, and USD/JPY is likely to remain stable.
• China's economic slowdown and stock market performance are key factors affecting the CNY and other Asian currencies.
• The HKMA is actively intervening to maintain the USD/HKD peg, despite concerns over the CNY's future status.
• Singapore's economy narrowly avoided a technical recession, and the SGD policy band is flattening.
• Malaysia's MYR has been a weak performer and is expected to consolidate after a significant depreciation.
• Indonesia's IDR has shown less volatility, but its stock market is still vulnerable due to weak exports.
• Philippines' PHP is vulnerable to rate expectations reversing.
• Vietnam's VND remains weak, and India's INR is expected to stabilize depreciation.

Conclusion

The document emphasizes that while there was a short-lived relief rally in currencies, the underlying factors, such as monetary policy divergences and economic conditions, continue to influence FX markets. The USD remains strong, supported by the Fed's delayed rate hikes and the ECB's potential for additional stimulus. Asian currencies, particularly the CNY and MYR, face continued challenges, while the JPY and SGD show more stability. The outlook for the next few quarters is cautiously optimistic for the USD, with the potential for further appreciation against many Asian currencies.