SGX Market Strategist, Equity & Fixed Income, Singapore Exchange Ltd (SGX)

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

Asia’s leading multi-asset exchange

Singapore Exchange Ltd (SGX)

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Headquartered in AAA-rated Singapore, SGX has over 800 employees including offices in Beijing, Chicago, Hong Kong, London, New York, Mumbai, San Francisco, Shanghai and Tokyo.

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SGX Asia FX Insights

By Macro Hive

<ul>
<li>Yield support to boost CNH through Q4</li>
	<li>Equity outflows bring recent rupee appreciation to an end</li>
	<li>NEER back within band allows scope for further TWD strength</li>
	<li>September’s KRW strength to continue with improving macro  </li>
	<li>MAS October policy review in focus for S$NEER</li>
</ul>
Spotlight View #1: A Strong Quarter for CNH

The CNH got another medium-term support with confirmation that Chinese government bonds will be included in the FTSE Russell World Government Bond Index. The late September announcement that Chinese bonds will be added as of next year will mean around $140bn during the first 12 months of the inclusion, according to some estimates. It should also secure a structural shift towards foreign participation in the country’s debt market. China’s debt market has already seen inflows this year, but, with foreign holdings at just 9% of the total, there is significant scope to expand. That China’s yield spread over 10-year US Treasuries is currently the highest in more than a decade should attract further inflows (Chart 1).  

Capital inflows combined with a widening C/A surplus, the result of strong exports and a drop back in tourism outflows, point to further CNH appreciation. China’s basic balance (CA plus net FDI and net portfolio flows) climbed to 1.6% of GDP in Q2 from just 0.8% in Q1. We expect this moved higher again in Q3 given that CNH strengthened nearly 4% through the quarter. This also marked the currency’s strongest quarter for more than a decade and placed it second only to the Chilean peso in EM.

Despite the positive news from the FTSE Russell announcement, USD/CNH has strengthened from the mid-September low of 6.74. The currency pair is now trading back above 6.80 as a bout of dollar strength and a US equity correction have left EM currencies weaker across the board. But worries over ongoing US-China frictions may also be playing a role in the recent yuan weakening. Friday’s announcement that China’s leading chipmaker, SMIC, will now face export restrictions comes on top of the increased Huawei restrictions now in place. This could leave the country’s semiconductor industry struggling to source important technology and components. 

Restricted access to US tech could, if prolonged, dent what has otherwise been an ongoing economic recovery. Industrial profits were up 19% YoY in August, the third consecutive double-digit gain, reflecting the continued improvement in exports and IP (Chart 2). September PMI data showed China’s manufacturing and services sectors remaining in expansionary territory, albeit with the pace of expansion now slowing after what has been a sharp rebound.

Retail sales have been a weak spot in the recovery, leaving China’s Golden Week holiday, beginning 1 October, as an important test of any sustained consumption revival. Domestic travel is expected to be high with <a href="https://www.ft.com/content/0c9472e7-ad98-4b94-bd44-2037b338665f">600mn trips</a> projected over the eight-day holiday leaving the tourism sector, and services more generally, poised to benefit. It will also be a key test of COVID prevention given the scale of movement expected through the week.

With just a month left before the US election, we do not rule out further US-China tensions over the coming weeks. We continue to see mostly rhetoric rather than any concrete policy action not least due to timing, with polls pointing to a win for Democratic presidential nominee Joe Biden. Trade policy is one of the most important aspects for Asia in the US election. And while a Biden win will not reset US-China trade relations to their earlier state, it should mean a more predictable and rules-based trade policy for the region.    

Despite USD/CNH now back above 6.80, we continue to see a move towards 6.70 by year end. Yield support is one factor, with the PBoC leaving the loan prime rates unchanged at the recent policy meeting. A more flexible approach to reducing interest rates set out in the recent quarterly monetary policy review also suggests any further easing will not come via lower benchmark rates. Favourable fundamentals and a competitive valuation also point to further CNH appreciation.
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Spotlight View #2: INR Weakens as Equity Flows Reverse 

After rallying sharply through August, the rupee sold off in September with the 0.2% drop in INR against USD contrasting with monthly gains in KRW, TWD and CNH. Nothing material has changed in India’s macro outlook during recent weeks, and latest data continue to point to an uneven, yet ongoing, economic recovery despite the relentless rise in new COVID cases (India has now reached 6mn cases). INR weakness instead reflects a consolidation after the 1.6% rally (vs USD) in August combined with a drop back in risk sentiment. USD/INR nevertheless remains below 74 (or SGX INR/USD futures above 134), its lowest level since March but one big figure higher than the early September low of below 73 (or SGX INR/USD high of 137).  

The RBI stepped up dollar purchases sharply in July, with FX intervention at an all-time high of $15.9bn. FX reserves have increased by another $10bn since then (data through 14 September), which looks to be the RBI slowing the pace of August appreciation, particularly as India recorded a huge $6.1bn in equity inflows through the month (Chart 4). By contrast, September has seen around $660mn in outflows. While this is in line with the rest of the region, it starkly contrasts the earlier high inflows. Given the reserves accumulation during recent months, the RBI can step in to offset rupee weakness should it choose to do so.

As things stand, the combination of above-target inflation (6.7% YoY), an exceptionally weak growth outlook and increasingly large government financing needs leave a difficult balancing act for the RBI. To manage the competing objectives, the bank has stepped up liquidity provision to prevent yields from moving higher (Chart 3), continued with operation twist to actively push longer-term yields down and paused with cuts to the policy rate. The RBI was expected to leave rates on hold again at 4% at the scheduled 1 October meeting, but the meeting has been postponed due to the government’s failure to appoint three new external MPC members. Inflation concerns will likely dominate for now, and we do not expect the RBI to allow any significant currency weakness.  

Given INR’s high-yielder status and significant bond supply likely over the coming few months, we remain constructive on INR on potential carry gains.    
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Spotlight View #3: TWD Strength Continues

The relentless appreciation of the Taiwanese dollar continued through September. SGX TWD/USD futures reached a high of almost 0.35 in September. It gave back some of those gains, but it since strengthened again. TWD remains the region’s second-best performer this year (after PHP), with a gain of over 3% versus USD and 1.8% in Q3 (Chart 6). Alongside China, Taiwan has the strongest fundamentals, although the milder COVID outbreak in Taiwan and the absence of a very steep contraction complicate comparisons for this year. Further appreciation will remain a function of central bank intervention, but, with the US Treasury’s FX manipulation report due in the coming weeks, we expect the CBC to allow further strengthening against the USD.   

Another reason why the CBC may be comfortable with TWD strength is the easing back in the NEER appreciation seen through H1. TWD weakness against the EUR has allowed the trade-weighted exchange rate to drop back from earlier highs and, crucially, back within the CBC’s preferred +/-5pp band for the past two months. Assuming further broad dollar weakness, the NEER should remain within the CBC comfort levels.    

Taiwan’s economy can withstand a stronger currency. August export orders hit 13.6% YoY in August, the highest in more than two years; IP growth is robust; and unemployment has declined for the past three months and, at 3.8%, is barely higher than a year ago. Importantly, recent releases have tended to be better than expected, and expectations for economic growth have generally been marked upwards. CPI is also inching out of deflationary territory (the -0.3% YoY reading in August was the highest since March), which should also limit concerns over any further currency appreciation. 

We expect the CBC will continue to limit the pace of TWD strength, but not the trend, and retain our view of TWD moving higher.
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Rest of Asia FX

KRW – September’s Best Performer 

The Korean won was Asia’s best-performing currency in September, with KRW up by almost 1.6% versus USD. A brief flirt with 1160 was the strongest level since January, but the currency has since pulled back close to 1170. The won has largely followed gains in the stock market, with the KOSPI rising through mid-September until the correction in US stocks, and renewed dollar strength dampened risk appetite. Bond market inflows have been another support for the currency, with the $6.9bn inflows through September more than double that recorded in July.

Korea’s recovery also looks to be gathering steam. The early reading on September exports (based on the first 20 days of the month) showed a 3.6% YoY, the first positive reading since March and a sharp improvement from the -7.5% YoY in July. A favourable working-day effect was partly behind the improvement, but strong gains in exports to China and in semiconductors were important positives. 

The won’s low-yielder status will limit further appreciation. But with an improving BoP position, albeit partly on the back of weak exports, we remain constructive and see scope for a moderate strengthening.

SGD – Following Global Risk Sentiment 

MAS’s October biannual monetary policy review will determine the S$NEER outlook. If, as expected, policy is left accommodative with no change to the midpoint of the band and the NEER slope left at zero, USD/SGD will continue to trade with global risk sentiment. Five months of deflation and a long recovery ahead, despite the recent rebound in IP (13.7% YoY) and non-oil domestic exports (7.7% YoY), suggest no need to adjust policy right now. Significant fiscal loosening will continue to provide the main policy support, with MAS instead focusing on maintaining price stability.

MAS and other central banks in Asia will closely watch the upcoming <a href="https://macrohive.com/hive-exclusives/taiwan-thailand-and-vietnam-all-risk-currency-manipulator-label/?add-to-cart=6305">US Treasury FX manipulation report</a>. We expect Singapore to remain on the watchlist, but, as it does not meet the criteria of a bilateral trade surplus with the US of at least $20bn, there is a low risk of any currency manipulation label. Nevertheless, MAS’s April disclosure of $29.9bn in net FX purchases through H2 2019 likely caught the attention of the Treasury, and, with H1 2020 data due for release in October, MAS FX intervention will be in the spotlight.  
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<html><body>(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by Macro Hive Limited. While SGX has participated as a sponsor, SGX  has not had any input into the content and neither SGX nor its affiliates shall be responsible or liable for the same.)</body></html>



SGX Asia FX Insights

By Macro Hive


Yield support to boost CNH through Q4
	Equity outflows bring recent rupee appreciation to an end
	NEER back within band allows scope for further TWD strength
	September’s KRW strength to continue with improving macro  
	MAS October policy review in focus for S$NEER

Spotlight View #1: A Strong Quarter for CNH

The CNH got another medium-term support with confirmation that Chinese government bonds will be included in the FTSE Russell World Government Bond Index. The late September announcement that Chinese bonds will be added as of next year will mean around $140bn during the first 12 months of the inclusion, according to some estimates. It should also secure a structural shift towards foreign participation in the country’s debt market. China’s debt market has already seen inflows this year, but, with foreign holdings at just 9% of the total, there is significant scope to expand. That China’s yield spread over 10-year US Treasuries is currently the highest in more than a decade should attract further inflows (Chart 1).  

Capital inflows combined with a widening C/A surplus, the result of strong exports and a drop back in tourism outflows, point to further CNH appreciation. China’s basic balance (CA plus net FDI and net portfolio flows) climbed to 1.6% of GDP in Q2 from just 0.8% in Q1. We expect this moved higher again in Q3 given that CNH strengthened nearly 4% through the quarter. This also marked the currency’s strongest quarter for more than a decade and placed it second only to the Chilean peso in EM.

Despite the positive news from the FTSE Russell announcement, USD/CNH has strengthened from the mid-September low of 6.74. The currency pair is now trading back above 6.80 as a bout of dollar strength and a US equity correction have left EM currencies weaker across the board. But worries over ongoing US-China frictions may also be playing a role in the recent yuan weakening. Friday’s announcement that China’s leading chipmaker, SMIC, will now face export restrictions comes on top of the increased Huawei restrictions now in place. This could leave the country’s semiconductor industry struggling to source important technology and components. 

Restricted access to US tech could, if prolonged, dent what has otherwise been an ongoing economic recovery. Industrial profits were up 19% YoY in August, the third consecutive double-digit gain, reflecting the continued improvement in exports and IP (Chart 2). September PMI data showed China’s manufacturing and services sectors remaining in expansionary territory, albeit with the pace of expansion now slowing after what has been a sharp rebound.

Retail sales have been a weak spot in the recovery, leaving China’s Golden Week holiday, beginning 1 October, as an important test of any sustained consumption revival. Domestic travel is expected to be high with 600mn trips projected over the eight-day holiday leaving the tourism sector, and services more generally, poised to benefit. It will also be a key test of COVID prevention given the scale of movement expected through the week.

With just a month left before the US election, we do not rule out further US-China tensions over the coming weeks. We continue to see mostly rhetoric rather than any concrete policy action not least due to timing, with polls pointing to a win for Democratic presidential nominee Joe Biden. Trade policy is one of the most important aspects for Asia in the US election. And while a Biden win will not reset US-China trade relations to their earlier state, it should mean a more predictable and rules-based trade policy for the region.    

Despite USD/CNH now back above 6.80, we continue to see a move towards 6.70 by year end. Yield support is one factor, with the PBoC leaving the loan prime rates unchanged at the recent policy meeting. A more flexible approach to reducing interest rates set out in the recent quarterly monetary policy review also suggests any further easing will not come via lower benchmark rates. Favourable fundamentals and a competitive valuation also point to further CNH appreciation.



      
    
    202010_1E


Spotlight View #2: INR Weakens as Equity Flows Reverse 

After rallying sharply through August, the rupee sold off in September with the 0.2% drop in INR against USD contrasting with monthly gains in KRW, TWD and CNH. Nothing material has changed in India’s macro outlook during recent weeks, and latest data continue to point to an uneven, yet ongoing, economic recovery despite the relentless rise in new COVID cases (India has now reached 6mn cases). INR weakness instead reflects a consolidation after the 1.6% rally (vs USD) in August combined with a drop back in risk sentiment. USD/INR nevertheless remains below 74 (or SGX INR/USD futures above 134), its lowest level since March but one big figure higher than the early September low of below 73 (or SGX INR/USD high of 137).  

The RBI stepped up dollar purchases sharply in July, with FX intervention at an all-time high of $15.9bn. FX reserves have increased by another $10bn since then (data through 14 September), which looks to be the RBI slowing the pace of August appreciation, particularly as India recorded a huge $6.1bn in equity inflows through the month (Chart 4). By contrast, September has seen around $660mn in outflows. While this is in line with the rest of the region, it starkly contrasts the earlier high inflows. Given the reserves accumulation during recent months, the RBI can step in to offset rupee weakness should it choose to do so.

As things stand, the combination of above-target inflation (6.7% YoY), an exceptionally weak growth outlook and increasingly large government financing needs leave a difficult balancing act for the RBI. To manage the competing objectives, the bank has stepped up liquidity provision to prevent yields from moving higher (Chart 3), continued with operation twist to actively push longer-term yields down and paused with cuts to the policy rate. The RBI was expected to leave rates on hold again at 4% at the scheduled 1 October meeting, but the meeting has been postponed due to the government’s failure to appoint three new external MPC members. Inflation concerns will likely dominate for now, and we do not expect the RBI to allow any significant currency weakness.  

Given INR’s high-yielder status and significant bond supply likely over the coming few months, we remain constructive on INR on potential carry gains.    



      
    
    202010_2E


Spotlight View #3: TWD Strength Continues

The relentless appreciation of the Taiwanese dollar continued through September. SGX TWD/USD futures reached a high of almost 0.35 in September. It gave back some of those gains, but it since strengthened again. TWD remains the region’s second-best performer this year (after PHP), with a gain of over 3% versus USD and 1.8% in Q3 (Chart 6). Alongside China, Taiwan has the strongest fundamentals, although the milder COVID outbreak in Taiwan and the absence of a very steep contraction complicate comparisons for this year. Further appreciation will remain a function of central bank intervention, but, with the US Treasury’s FX manipulation report due in the coming weeks, we expect the CBC to allow further strengthening against the USD.   

Another reason why the CBC may be comfortable with TWD strength is the easing back in the NEER appreciation seen through H1. TWD weakness against the EUR has allowed the trade-weighted exchange rate to drop back from earlier highs and, crucially, back within the CBC’s preferred +/-5pp band for the past two months. Assuming further broad dollar weakness, the NEER should remain within the CBC comfort levels.    

Taiwan’s economy can withstand a stronger currency. August export orders hit 13.6% YoY in August, the highest in more than two years; IP growth is robust; and unemployment has declined for the past three months and, at 3.8%, is barely higher than a year ago. Importantly, recent releases have tended to be better than expected, and expectations for economic growth have generally been marked upwards. CPI is also inching out of deflationary territory (the -0.3% YoY reading in August was the highest since March), which should also limit concerns over any further currency appreciation. 

We expect the CBC will continue to limit the pace of TWD strength, but not the trend, and retain our view of TWD moving higher.



      
    
    202010_3E


Rest of Asia FX

KRW – September’s Best Performer 

The Korean won was Asia’s best-performing currency in September, with KRW up by almost 1.6% versus USD. A brief flirt with 1160 was the strongest level since January, but the currency has since pulled back close to 1170. The won has largely followed gains in the stock market, with the KOSPI rising through mid-September until the correction in US stocks, and renewed dollar strength dampened risk appetite. Bond market inflows have been another support for the currency, with the $6.9bn inflows through September more than double that recorded in July.

Korea’s recovery also looks to be gathering steam. The early reading on September exports (based on the first 20 days of the month) showed a 3.6% YoY, the first positive reading since March and a sharp improvement from the -7.5% YoY in July. A favourable working-day effect was partly behind the improvement, but strong gains in exports to China and in semiconductors were important positives. 

The won’s low-yielder status will limit further appreciation. But with an improving BoP position, albeit partly on the back of weak exports, we remain constructive and see scope for a moderate strengthening.

SGD – Following Global Risk Sentiment 

MAS’s October biannual monetary policy review will determine the S$NEER outlook. If, as expected, policy is left accommodative with no change to the midpoint of the band and the NEER slope left at zero, USD/SGD will continue to trade with global risk sentiment. Five months of deflation and a long recovery ahead, despite the recent rebound in IP (13.7% YoY) and non-oil domestic exports (7.7% YoY), suggest no need to adjust policy right now. Significant fiscal loosening will continue to provide the main policy support, with MAS instead focusing on maintaining price stability.

MAS and other central banks in Asia will closely watch the upcoming US Treasury FX manipulation report. We expect Singapore to remain on the watchlist, but, as it does not meet the criteria of a bilateral trade surplus with the US of at least $20bn, there is a low risk of any currency manipulation label. Nevertheless, MAS’s April disclosure of $29.9bn in net FX purchases through H2 2019 likely caught the attention of the Treasury, and, with H1 2020 data due for release in October, MAS FX intervention will be in the spotlight.  



      
    
    202010_4E

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by Macro Hive Limited. While SGX has participated as a sponsor, SGX  has not had any input into the content and neither SGX nor its affiliates shall be responsible or liable for the same.)


China

Semiconductor Manufacturing International Corporation operates a semiconductor foundry. The Company provides integrated circuit foundry and technology services including the testing, development, design, manufacturing, packaging, and sale of integrated circuits. Semiconductor Manufacturing International offers its products and services around the world.

Semiconductor Manufacturing International Corp (SMIC) (981 HK)

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SGX Asia FX Insights

SGX Asia FX Insights By Macro Hive Yield support to boost CNH through Q4 Equity outflows bring recent rupee appreciation to an end NEER back...

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