EM FX Weekly – Yuan to depreciate moderately

by: Roy Teo , Georgette Boele

In this publication: Strong divergence in performance among EM currencies. Chinese yuan to depreciate moderately versus US dollar. The IDR is resilient while the KRW underperforms. MAS to keep S$NEER policy unchanged in April.


EM-FX-weekly-25-Feb-2016.pdf (215 KB)


EM FX divergence

Since last Thursday, emerging market currencies have showed a mixed performance versus the US dollar. This was mainly because of a lack of direction in commodity prices and swings in investor sentiment. The Russian ruble was the weakest performer and also the Czech Koruna and Hungarian forint underperformed. An official of the Central Bank of Russia said that it is avoiding the trap of intervening to shield the ruble from volatility in oil prices. This would only raise the risk of a bigger adjustment in the exchange rate further down the road. The central bank of Hungary signalled that it will likely ease further. This has weighed on the forint. On the other hand, the Brazilian real outperformed despite Moody’s downgrade of Brazil by two notches to below investment grade, which weighed only temporarily on the real. This signals that this move was widely anticipated and that the real is becoming more resilient.

Chinese yuan to depreciate moderately versus US dollar

The Chinese yuan (CNY) has remained steady against currencies of its main trading partners (TWI) in the past few weeks. This is likely to continue for the remainder of this year, although we do expect a moderate depreciation against the US dollar. Our 2016 year-end USD/CNY forecast is 6.70.

CPI in China has been rising gradually from 1.3% in October 2015 to 1.8% yoy last month. Though export growth has disappointed in January, trade data are typically distorted at the start of the year due to Lunar New Year effect, while other special factors and weak external demand also played a role. According to the Bank of International Settlements (BIS), cross border claims on China with remaining maturities of up to one year have declined to about USD 626bn as of end September 2015. We expect cross border claims to decline further when the BIS next updates figures for the end of 2015. With foreign currency reserves of USD 3.2trln as of January 2016, the People’s Bank of China (PBoC) has sufficient ammunition to defend weakness in the yuan due to repayment of liabilities denominated in foreign currencies. Speculative attacks on the yuan will likely result in tighter surveillance mechanisms. Indeed, market bets of a weaker yuan have abated in recent weeks.

China opens up interbank bond market

The exchange rate is not a panacea to some of China’s woes. Policies to tackle overcapacity, poor productivity, inefficiencies and improve transparency are needed. The PBoC has opened the domestic interbank bond market to foreign institutional investors. A deeper more liquid bond market will allow companies to refinance foreign denominated debt with local debt. This will alleviate higher debt repayments when/if the yuan depreciates further. China’s manufacturing and non-manufacturing PMI data for February (to be released on 1 March) will be closely watched.

The IDR is resilient, while the KRW underperforms

In Asia, the Indonesian rupiah (IDR) continues to be favoured by investors due to its attractive yield and improving economic prospects as Bank Indonesia (BI) cut interest rates by 25bp on 18 February. However, local banks have stated that there are no plans to increase loan growth this year due to both domestic and global risks. Hence the positive effects on economic growth due to more accommodative monetary policy may be limited. In our view, BI is unlikely to tolerate further gains in the IDR after its 8% appreciation (against currencies of Indonesia’s main trading partners) since September 2015 as it would impact exports growth which remains weak. On the other hand, the South Korean won (KRW) underperformed due to geopolitical risks and market bets that the Bank of Korea is likely to ease monetary policy sooner than later. However losses were retraced due to intervention fears from the central bank.

MAS to keep S$NEER policy unchanged in April; 2016 USD/SGD forecast 1.46

The Monetary Authority of Singapore (MAS) has downgraded its headline inflation forecast for 2016 from -0.5-0.5% to -1.0-0.0% yoy, due to the decline in oil prices and falling private road transport costs. We maintain our view that the MAS is likely to keep its S$NEER appreciation policy unchanged in the next scheduled monetary policy meeting in April, as core inflationary pressures are expected to gradually rise supported by base year effects. We expect the Singapore economy to grow 2% yoy this year, at a similar pace as in 2015. Our year-end USD/SGD forecast is 1.46.

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