Singapore Exchange Ltd (SGX)

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Asia’s leading multi-asset exchange

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

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

Equity Bottom-Up

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By Macro Hive

<ul>
<li>CNH set to test new lows for the year </li>
	<li>Fiscal easing leaves scope for SGD appreciation</li>
	<li>New highs in India’s basic balance support further INR strength</li>
	<li>TWD appreciation to resume on strong fundamentals</li>
	<li>Won set for further modest gains despite COVID spike  </li>
</ul>
Spotlight View #1: Remaining Bullish CNH despite recent gains

Our positive view on CNH remains intact despite the recent appreciation. CNH is now below the January low, and at 6.82 the currency has strengthened by 5% versus the USD since May, and by almost 2% in August alone. The question now is how much further this downtrend has to go. We continue to see scope for further gains as CNH remains competitive on a trade-weighted basis, PBoC appear relaxed over increasing inflows and the economy is continuing to gather pace.

Preliminary data for the Q2 balance of payments show the Q2 surplus as the largest since 2008 at almost $120bn, compared with a deficit in Q1. The largest trade surplus in more than 20 years combined with a sizeable narrowing in the services deficit both played a role. Full capital account data are yet to be released, but we can see that foreign equity inflows picked up sharply through June. Yet despite this combination of a significant C/A surplus and portfolio inflows, FX reserves accumulation has been modest. We attribute this to capital flight plus some USD hoarding rather than any undisclosed intervention. As such, we see PBoC as comfortable with the level and trend of the currency.

One key reason for PBoC comfort is that CNH remains competitive. Versus the EUR or JPY, appreciation has been more modest leaving the CFETS basket only slightly stronger since May. China’s competitive currency is also observable in its export performance. World exports recorded double-digit declines through Q2, whereas the export contraction in China was more modest. And July exports were reported at a much better-than-expected 7.2% YoY versus 0.5% in June. China’s earlier lockdown explains some of the better performance, but, even looking at YTD performance, China has held up much better than elsewhere, with the currency playing a role. Given that consumption remains weak despite some pick-up in new home sales and car purchases in recent months, any boost from exports will undoubtedly be welcome.  

US-China tensions remain a risk going into the November US election, but the recent affirmation of commitment to the Phase 1 trade deal has eased concerns over any near-term escalation. A 24 August phone call between US Trade Representative Lighthizer and Treasury Secretary Mnuchin with Chinese Vice Premier Liu He agreed on the ‘progress’ made so far and reaffirmed commitment to ‘ensure the success of the agreement’. That China’s purchases of US goods through July remain around just half the level needed to keep the agreed targets on track posed no stumbling block. A stronger currency versus the USD likely helps to support the trade deal, with the focus here squarely on the bilateral exchange rate. Tensions over Hong Kong and technology are nevertheless likely to remain in place, but we do not expect these to have a significant market impact.   

With US election risks and the Fed’s announced shift to average inflation targeting set to push US real yields even lower, the weak dollar trend looks set to continue. Combined with CNH fundamentals remaining strong, we expect USD/CNH to continue to edge lower. And with the January lows now passed, we see a move to 6.80. 
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Spotlight View #2: Fiscal easing allows space for further SGD gains  

SGD recorded its third consecutive monthly gain in August (appreciating 1.06% versus the USD), with the currency now trading at its strongest level since late January. Broad dollar weakness and positive risk sentiment have both played a role, while another S$8bn in fiscal support – on top of the already sizeable fiscal response to the COVID crisis – should help support the economic recovery.

Singapore’s massive fiscal stimulus, now around S$100bn or 20% of GDP over five packages and financed via the country’s fiscal reserves, also relieves pressure on MAS for any further loosening in monetary policy. S$NEER is broadly unchanged since MAS eased policy in March by reducing the slope of the NEER band to zero and lowering the midpoint. Expectations are for the accommodative monetary policy stance to remain unchanged at the next biannual review in October. Inflation is expected to improve from the current -0.4% YoY, and the economy is expected to stabilise, with non-oil exports back in positive territory and retail sales picking up from the earlier collapse.

Further USD weakness and an unchanged policy stance from MAS should allow the current trend of SGD/$ appreciation to continue with the NEER remaining stable. This combination could also help deflect US attention away from the huge size of MAS FX intervention. Singapore’s central bank disclosed FX intervention for the first time earlier this year and is set to make its next six-monthly announcement in early October. The $29.9bn reported for H2 2019 is equivalent to 8% of GDP which, if annualized, leaves MAS intervention double the size of any other country on the US Treasury’s monitoring list. While the choice of exchange rate regime reflects the much greater role of the exchange rate versus interest rates in a small and highly open economy, continued modest currency appreciation versus the USD would ease any unwanted attention on MAS policy. We expect further modest appreciation from here. 
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Spotlight View #3: Turning positive on INR  

INR’s usual seasonal pattern of August weakness came to a halt this year. Appreciation of almost 2% through the month left the rupee as the region’s best-performing currency and saw the currency trade sub 74/USD for the first time since March. The sizeable FX intervention over recent months – FX reserves are up almost $50bn through the first six months of the year – looks to have come to an end and leaves questions over a change of exchange rate strategy from the RBI. Given this policy shift, we no longer expect INR weakness and see scope for further modest appreciation.  

Second quarter BoP data will be released in the coming weeks, and we expect to see India’s basic balance (C/A + FDI + portfolio flows) approach new highs. Merchandise trade data show the goods deficit narrowing from around $35bn in Q1 to just $9bn in Q2, with oil imports down by $20bn or 60% QoQ. And with services exports holding up (monthly data put the Q2 services surplus largely unchanged from Q1 at $21bn), the headline C/A is likely to have remained in surplus. But the bigger driver is FDI, and to a lesser extent portfolio inflows. As we have discussed in earlier notes, India has seen sizeable inflows, much of which has been directed towards Reliance Industries / Jio Platforms. Over the past two months, foreign equity inflows have reached a very significant $7bn, outpacing the $4bn in Q2 and a Q1 outflow. This points to second quarter basic balance climbing above the $20bn in the first three months of the year (just under 1% of GDP) and then towards the 2016 highs of around $30bn in H2.

New highs in India’s basic balance and an RBI abandoning its earlier prudent stance of mopping up inflows, perhaps due to concerns over the extent of balance sheet expansion, point to scope for further rupee appreciation. Carry remains attractive with the RBI on hold at 4% last month, leaving nominal rates among the highest in EM.

The supportive BoP and carry should offset ongoing economic weakness. COVID continues to spread rapidly with now more than 3mn cases in India and the country recording the world’s highest daily case increases (&gt;70,000) in recent weeks. Efforts to tame the virus will delay the recovery and leave India even further behind others in Asia in normalising its economy. GDP growth for the April-June quarter was reported at -23.9% YoY (consensus at -18.0%), marking a significantly deeper contraction than elsewhere in Asia. While Q2 is expected to be the low for activity, the continued run-up in COVID and the absence of any new policy support leaves the economy on track to record one of the deepest contractions in Asia this year.  

Rising inflation and fiscal constraints are not helping. Just four months into India’s fiscal year, the deficit exceeded the INR7.96tn target (3.5% of GDP) with revenues slumping. The IMF’s April Fiscal Monitor already saw the deficit at 7.4%, and, given the downward growth revisions since then, this could yet be worse. RBI bond buying could help budget financing but would raise further concern over the bank’s independence. Former deputy governor, Viral Acharya, warned recently that any monetizing of the deficit would risk both inflation and external stability and at this point seems unlikely. Instead, the RBI looks set to continue its efforts to push down long end yields with further twist operations.     

We exit our previously bearish view and now see INR benefiting from its high-yielding status and significant basic balance improvement.
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Rest of Asia FX

TWD – Appreciation to resume on strong fundamentals

TWD’s appreciation trend stalled in August as a reversal in foreign equity flows and ongoing central bank intervention offset what should be a very healthy current account surplus through Q3. Recent data showed the second quarter C/A surplus at $21.8bn, or 11.2% of GDP (four-quarter sum) with the basic balance in excess of 22% of GDP. Despite the very sizeable surplus, a 3% appreciation of the TWD NEER through H1 raised competitiveness concerns particularly with the NEER breaking above the +/-5% band for the first time since 2017. Central bank FX purchases have now pushed the NEER back within the band in recent weeks but at the cost of increasingly rapid balance sheet expansion. We expect the central bank will continue to slow the pace of appreciation but not the trend. With strong fundamentals and the looming prospect of TWD being added back to the US Treasury monitoring list, we expect a steady grind lower for TWD.  

KRW – Resilience in spite of second COVID wave

The won has largely decoupled from South Korea’s rapidly rising COVID cases, with improving macro data compared with the Q2 lows and the country’s test-and-trace technology limiting the economic fallout. The government’s 23 August warning of the possibility of a ‘massive nationwide outbreak’ in virus cases did push the currency off the 1180 low, but KRW still managed to end August 0.3% stronger against the USD, a better performance than IDR, THB or TWD. The tightening in social distancing rules will nevertheless hurt the recovery, prompting the government to formulate yet another support package to help small businesses. The Bank of Korea opted against further stimulus at its late August meeting, leaving the policy rate on hold at 0.5% as expected, and downgrading its GDP growth forecast for this year to -1.3%, from an earlier -0.2%. Governor Lee Ju-yeol said the bank still had room to cut rates if needed, but with significant fiscal support already in place further monetary easing seems likely only if South Korea’s recovery slows significantly. With KRW undervalued, we continue to see scope for some modest appreciation.
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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>



By Macro Hive


CNH set to test new lows for the year 
	Fiscal easing leaves scope for SGD appreciation
	New highs in India’s basic balance support further INR strength
	TWD appreciation to resume on strong fundamentals
	Won set for further modest gains despite COVID spike  

Spotlight View #1: Remaining Bullish CNH despite recent gains

Our positive view on CNH remains intact despite the recent appreciation. CNH is now below the January low, and at 6.82 the currency has strengthened by 5% versus the USD since May, and by almost 2% in August alone. The question now is how much further this downtrend has to go. We continue to see scope for further gains as CNH remains competitive on a trade-weighted basis, PBoC appear relaxed over increasing inflows and the economy is continuing to gather pace.

Preliminary data for the Q2 balance of payments show the Q2 surplus as the largest since 2008 at almost $120bn, compared with a deficit in Q1. The largest trade surplus in more than 20 years combined with a sizeable narrowing in the services deficit both played a role. Full capital account data are yet to be released, but we can see that foreign equity inflows picked up sharply through June. Yet despite this combination of a significant C/A surplus and portfolio inflows, FX reserves accumulation has been modest. We attribute this to capital flight plus some USD hoarding rather than any undisclosed intervention. As such, we see PBoC as comfortable with the level and trend of the currency.

One key reason for PBoC comfort is that CNH remains competitive. Versus the EUR or JPY, appreciation has been more modest leaving the CFETS basket only slightly stronger since May. China’s competitive currency is also observable in its export performance. World exports recorded double-digit declines through Q2, whereas the export contraction in China was more modest. And July exports were reported at a much better-than-expected 7.2% YoY versus 0.5% in June. China’s earlier lockdown explains some of the better performance, but, even looking at YTD performance, China has held up much better than elsewhere, with the currency playing a role. Given that consumption remains weak despite some pick-up in new home sales and car purchases in recent months, any boost from exports will undoubtedly be welcome.  

US-China tensions remain a risk going into the November US election, but the recent affirmation of commitment to the Phase 1 trade deal has eased concerns over any near-term escalation. A 24 August phone call between US Trade Representative Lighthizer and Treasury Secretary Mnuchin with Chinese Vice Premier Liu He agreed on the ‘progress’ made so far and reaffirmed commitment to ‘ensure the success of the agreement’. That China’s purchases of US goods through July remain around just half the level needed to keep the agreed targets on track posed no stumbling block. A stronger currency versus the USD likely helps to support the trade deal, with the focus here squarely on the bilateral exchange rate. Tensions over Hong Kong and technology are nevertheless likely to remain in place, but we do not expect these to have a significant market impact.   

With US election risks and the Fed’s announced shift to average inflation targeting set to push US real yields even lower, the weak dollar trend looks set to continue. Combined with CNH fundamentals remaining strong, we expect USD/CNH to continue to edge lower. And with the January lows now passed, we see a move to 6.80. 



      
    
    202009_1E


Spotlight View #2: Fiscal easing allows space for further SGD gains  

SGD recorded its third consecutive monthly gain in August (appreciating 1.06% versus the USD), with the currency now trading at its strongest level since late January. Broad dollar weakness and positive risk sentiment have both played a role, while another S$8bn in fiscal support – on top of the already sizeable fiscal response to the COVID crisis – should help support the economic recovery.

Singapore’s massive fiscal stimulus, now around S$100bn or 20% of GDP over five packages and financed via the country’s fiscal reserves, also relieves pressure on MAS for any further loosening in monetary policy. S$NEER is broadly unchanged since MAS eased policy in March by reducing the slope of the NEER band to zero and lowering the midpoint. Expectations are for the accommodative monetary policy stance to remain unchanged at the next biannual review in October. Inflation is expected to improve from the current -0.4% YoY, and the economy is expected to stabilise, with non-oil exports back in positive territory and retail sales picking up from the earlier collapse.

Further USD weakness and an unchanged policy stance from MAS should allow the current trend of SGD/$ appreciation to continue with the NEER remaining stable. This combination could also help deflect US attention away from the huge size of MAS FX intervention. Singapore’s central bank disclosed FX intervention for the first time earlier this year and is set to make its next six-monthly announcement in early October. The $29.9bn reported for H2 2019 is equivalent to 8% of GDP which, if annualized, leaves MAS intervention double the size of any other country on the US Treasury’s monitoring list. While the choice of exchange rate regime reflects the much greater role of the exchange rate versus interest rates in a small and highly open economy, continued modest currency appreciation versus the USD would ease any unwanted attention on MAS policy. We expect further modest appreciation from here. 



      
    
    202009_2E


Spotlight View #3: Turning positive on INR  

INR’s usual seasonal pattern of August weakness came to a halt this year. Appreciation of almost 2% through the month left the rupee as the region’s best-performing currency and saw the currency trade sub 74/USD for the first time since March. The sizeable FX intervention over recent months – FX reserves are up almost $50bn through the first six months of the year – looks to have come to an end and leaves questions over a change of exchange rate strategy from the RBI. Given this policy shift, we no longer expect INR weakness and see scope for further modest appreciation.  

Second quarter BoP data will be released in the coming weeks, and we expect to see India’s basic balance (C/A + FDI + portfolio flows) approach new highs. Merchandise trade data show the goods deficit narrowing from around $35bn in Q1 to just $9bn in Q2, with oil imports down by $20bn or 60% QoQ. And with services exports holding up (monthly data put the Q2 services surplus largely unchanged from Q1 at $21bn), the headline C/A is likely to have remained in surplus. But the bigger driver is FDI, and to a lesser extent portfolio inflows. As we have discussed in earlier notes, India has seen sizeable inflows, much of which has been directed towards Reliance Industries / Jio Platforms. Over the past two months, foreign equity inflows have reached a very significant $7bn, outpacing the $4bn in Q2 and a Q1 outflow. This points to second quarter basic balance climbing above the $20bn in the first three months of the year (just under 1% of GDP) and then towards the 2016 highs of around $30bn in H2.

New highs in India’s basic balance and an RBI abandoning its earlier prudent stance of mopping up inflows, perhaps due to concerns over the extent of balance sheet expansion, point to scope for further rupee appreciation. Carry remains attractive with the RBI on hold at 4% last month, leaving nominal rates among the highest in EM.

The supportive BoP and carry should offset ongoing economic weakness. COVID continues to spread rapidly with now more than 3mn cases in India and the country recording the world’s highest daily case increases (&gt;70,000) in recent weeks. Efforts to tame the virus will delay the recovery and leave India even further behind others in Asia in normalising its economy. GDP growth for the April-June quarter was reported at -23.9% YoY (consensus at -18.0%), marking a significantly deeper contraction than elsewhere in Asia. While Q2 is expected to be the low for activity, the continued run-up in COVID and the absence of any new policy support leaves the economy on track to record one of the deepest contractions in Asia this year.  

Rising inflation and fiscal constraints are not helping. Just four months into India’s fiscal year, the deficit exceeded the INR7.96tn target (3.5% of GDP) with revenues slumping. The IMF’s April Fiscal Monitor already saw the deficit at 7.4%, and, given the downward growth revisions since then, this could yet be worse. RBI bond buying could help budget financing but would raise further concern over the bank’s independence. Former deputy governor, Viral Acharya, warned recently that any monetizing of the deficit would risk both inflation and external stability and at this point seems unlikely. Instead, the RBI looks set to continue its efforts to push down long end yields with further twist operations.     

We exit our previously bearish view and now see INR benefiting from its high-yielding status and significant basic balance improvement.



      
    
    202009_3E


Rest of Asia FX

TWD – Appreciation to resume on strong fundamentals

TWD’s appreciation trend stalled in August as a reversal in foreign equity flows and ongoing central bank intervention offset what should be a very healthy current account surplus through Q3. Recent data showed the second quarter C/A surplus at $21.8bn, or 11.2% of GDP (four-quarter sum) with the basic balance in excess of 22% of GDP. Despite the very sizeable surplus, a 3% appreciation of the TWD NEER through H1 raised competitiveness concerns particularly with the NEER breaking above the +/-5% band for the first time since 2017. Central bank FX purchases have now pushed the NEER back within the band in recent weeks but at the cost of increasingly rapid balance sheet expansion. We expect the central bank will continue to slow the pace of appreciation but not the trend. With strong fundamentals and the looming prospect of TWD being added back to the US Treasury monitoring list, we expect a steady grind lower for TWD.  

KRW – Resilience in spite of second COVID wave

The won has largely decoupled from South Korea’s rapidly rising COVID cases, with improving macro data compared with the Q2 lows and the country’s test-and-trace technology limiting the economic fallout. The government’s 23 August warning of the possibility of a ‘massive nationwide outbreak’ in virus cases did push the currency off the 1180 low, but KRW still managed to end August 0.3% stronger against the USD, a better performance than IDR, THB or TWD. The tightening in social distancing rules will nevertheless hurt the recovery, prompting the government to formulate yet another support package to help small businesses. The Bank of Korea opted against further stimulus at its late August meeting, leaving the policy rate on hold at 0.5% as expected, and downgrading its GDP growth forecast for this year to -1.3%, from an earlier -0.2%. Governor Lee Ju-yeol said the bank still had room to cut rates if needed, but with significant fiscal support already in place further monetary easing seems likely only if South Korea’s recovery slows significantly. With KRW undervalued, we continue to see scope for some modest appreciation.



      
    
    202009_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.)


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