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Mid-quarter FX Update Summary

Core Content

This document provides a mid-quarter analysis of foreign exchange (FX) movements and outlooks for various currencies in early 2016, with a focus on the performance of the USD, EUR, JPY, and CNY. It highlights how global financial conditions, monetary policies, and economic fundamentals have influenced currency trends and expectations.

Main Points

Global Currencies: A Weak Start to 2016

• The January 2016 sell-off was more about equities than currencies, with global growth concerns and falling oil prices exacerbating the situation.
• Currencies, especially commodity and Asia ex Japan, were heavily impacted.
• Sentiment stabilized as major central banks adopted more dovish stances, but the USD failed to strengthen significantly due to doubts about the Fed's rate hike plans.

QE and Its Impact on Currencies

• QE policies in Japan and the Eurozone have led to currency devaluation and economic shrinkage in USD terms.
• These policies contributed to the oil price shock and export recession in emerging markets.
• QE is becoming less effective in supporting the USD, and monetary policy divergences may not be enough to lift it further.

CNY: Shift to a Basket-Based Regime

• China has moved away from a USD-based exchange rate regime and is now referencing the CNY against a basket of 13 currencies.
• The USD/CNY rate is expected to rise in a higher ascending price channel, with a mid-2016 forecast of 6.61–6.65.
• Speculation of a 10% depreciation is unlikely, as the CNY is aligned with the basket and less volatile.
• The HKD is still pegged to the USD, with the HKMA committed to defending the peg within its 7.75–7.85 band.

EUR: Stagnation Amid QE and Political Risks

• EUR/USD has been in a 1.05–1.15 range, with the ECB showing signs of considering further stimulus.
• The EUR faces downside risks from the Brexit referendum, which could trigger fears of Eurozone fragmentation.
• The ECB is unlikely to push EUR/USD below 1.05 without significant policy expansion.

JPY: Still in a Range, Despite Negative Rates

• USD/JPY remains within its post-QQE2 range, with the BOJ’s negative interest rates not enough to push it above 125.
• The JPY is seen as less excessively strong, and the BOJ is cautious about further depreciation due to both upside and downside risks.

Other Currencies: Regional and Fundamentals-Driven Movements

• TWD: Moves into the upper half of its ascending price channel due to weak domestic fundamentals and external volatility.
• IDR: Better but still vulnerable, with a forecast range of 13,770–15,200 by end-2016.
• PHP: No improvement, remaining in a stable range.
• VND: More flexible, with a forecast range of 22,198–22,960.
• INR: REER is on the strong side, with a forecast range of 67.5–69.6.
• AUD: Weakness helps the USD, with a forecast range of 0.69–0.65.
• NZD: A lower NEER is desired, with a forecast range of 0.64–0.58.

Key Information

Currency Performance in January 2016

• EUR/USD: Ranged between 1.05–1.15, with a DXY value of 99.606.
• USD/JPY: Stood at 121.03, with a range of 116–125.
• USD/CNY: Stood at 6.5766, moving into a new higher channel.
• USD/HKD: Moved into the second lowest quartile of its band, at 7.7801.
• USD/TWD: Stood at 33.483, in the upper half of its channel.
• USD/KRW: Volatile, with a range of 1,207–1,267.
• USD/SGD: Stood at 1.4239, moving into a higher range.
• USD/MYR: Stood at 4.1500, within the 4.10–4.45 range.
• USD/THB: Stood at 35.709, with a forecast of 36.5–37.4.
• USD/IDR: Stood at 13,770, with a forecast of 14,450–15,200.
• USD/PHP: Stood at 47.680, with no improvement expected.
• USD/VND: Stood at 22,198, with a forecast of 22,620–22,960.
• USD/INR: Stood at 67.780, with a forecast of 67.5–69.6.

Policy Outlook

• The Fed is expected to raise rates, but the DXY remains around 100.
• The ECB may expand QE to meet its inflation target.
• The BOJ is unlikely to hike rates, but may not cut them further due to high household debt.
• The HKMA is committed to defending the USD/HKD peg.
• The central bank of Taiwan is expected to cut rates again.
• Malaysia's central bank is likely to keep rates stable, but may consider a rate cut if needed.
• The BOT in Thailand is comfortable with THB depreciation as long as it aligns with regional trends.

Summary Table

Conclusion

The global FX market in early 2016 was characterized by volatility and uncertainty, driven by weak economic growth, falling oil prices, and divergent monetary policies. The USD remained stable but faced challenges in rising further, while the EUR and JPY were caught in trading ranges. The CNY shifted to a basket-based regime, and the HKD remained pegged to the USD. Emerging market currencies showed mixed performances, with some improving and others still vulnerable. Overall, the outlook for many currencies remains cautious, with central banks closely monitoring economic conditions and adjusting policies accordingly.