Asia Daily Update

North Asia:

** China: President Obama criticizes China's plans for foreign tech companies
** South Korea: Inflation falls further

CHINA:

President Obama has criticized China's plans for new rules for US tech companies. In comments to Reuters, he said that he was concerned about Beijing's plans for a far-reaching counterterrorism law that would require technology firms to hand over encryption keys, the passcodes that help protect data, and install security "backdoors" in their systems to give Chinese authorities surveillance access.

The PBoC set the USD-CNY fix higher again at 6.1543, up from 6.1513 on Monday and 6.1475 levels on Friday prior to the weekend's rate cut. The upper band for USD-CNY stands at 6.2774 and USD-CNY spot is trading at 6.2753, or 0.03% below the top band. We think USD-CNY will remain elevated with a gradual upside bias into Q3 as the market contemplates Fed tightening.

S KOREA: CPI inflation for February fell to 0.5% YoY from 0.8% in January and was below expectations of 0.7%. Core CPI inflation eased to 2.3% YoY from 2.4% in January and was below expectations of 2.4%.

South/Southeast Asia:

** India: Government/RBI adopts inflation targeting, CPI at 2-6% range
** Singapore: February PMI today to remain lackluster around the 50 mark
** Malaysia: BNM to leave rates unchanged this week ahead of GST introduction next month
** Indonesia: Falling inflation could see BI contemplate further rate cuts, provided USD-IDR is stable

INDIA: The focus shifts squarely to RBI now that the Union Budget is out of the way. We have noted to key criteria for further rate cuts from RBI, including 1) low inflation – which the government expects to be around 5-5.5% this year, below RBI’s target of 6%; and 2) responsible fiscal policy. The fiscal deficit surprisingly came in as expected at 4.1% of GDP for FY2014-15 and is projected to ease back only modestly at 3.9% for FY2015-16 vs the 3.6% target earlier. Nevertheless, efforts to broaden the tax base via the unified GST, boosts in infrastructure spending should be viewed positively by RBI.

- RBI Governor Rajan played down prospects of an imminent cut yesterday, saying that India has ‘high’ inflation and can’t cut rates ‘very quickly’ even as an ‘avalanche’ of capital inflows may present a case for reduction. In other words, there is a case to lower to help deter capital seeking higher returns. The next RBI meeting is on 7 April but we would still be cognizant of another inter-meeting move.

- In other news, the government formally agreed to inflation targeting. The objective is to “primarily maintain price stability, while keeping in mind the objective of growth”. The inflation target is set at 4% with a +/-2% band ie between 2-6%, starting from fiscal year 2016-2017 ie from April 2016. RBI had earlier stated that it aims to bring inflation below 6% by January 2016. RBI will be deemed to have failed the target if inflation is above 6% or below 2% for three consecutive quarters. If this occurs, RBI will be required to do three things:
i) provide reasons for missing the target;
ii) propose remedial actions; and
iii) provide an estimated timeframe for a return to the target.

- The decision was widely expected by the markets and should not be a surprise. We view it positively in helping to anchor inflationary expectations. For USD-INR, it held within a tight range yesterday between 61.80-62.00, within the broader range of 61.0-62.50 we’ve been tracking for the past month or so.

SINGAPORE: We get the February PMI today at 13:00GMT. Both the headline and electronics PMI are expected to remain subdued and hold around the 50 mark. USD-SGD edged up 30 pips yesterday to 1.3650. For the SGD NEER, we estimate it continued to weaken to -1.5% vs the mid-point from -1.4% yesterday for USD-SGD at 1.3650, USD-MYR at 3.6340, and USD-CNY at 6.2730.

MALAYSIA: There are two key events this week, including:

1) BNM policy meeting on Thursday – we expect rates to be left unchanged at 3.25%. This is also the unanimous response from the latest Bloomberg survey. Lingering concerns over the imminent GST introduction next month will be a factor keeping BNM cautious. This is despite falling headline inflation due to the collapse in energy prices eg inflation slipped to just 1% y/y in January vs the average of 2.8% in Q4 2014 and average of 3.2% for all of 2014. We see BNM in wait-and-see mode. A rate hike is off the radar screen now and the next rate move could well be a cut rather than a hike. However, a pre-condition would have to be FX stability; and

2) January trade numbers – exports are expected to expand by a modest 2% y/y from 2.7% previously, imports around 1.5% from 4.2% previously, and the trade surplus moderating to MYR7bn from MYR9.2bn previously.

- For USD-MYR, it closed firmer yesterday t 3.6300 from 3.6040 last Friday. The uptrend from the low at the end of August 2014 is seemingly still intact. We’s use the recent swing high of 3.6550 as the immediate and positive on a move above this with the next key barrier seen around the 3.7000 level. We’ll need to see a stabilization in commodity prices and growth to help support MYR.

INDONESIA: February inflation released yesterday came in at 6.3% y/y, below expectations of 6.7% and 7% previously. Core inflation, which excludes food and administrative prices, was stable at 5% y/y, unchanged from January. Bank Indonesia (BI) Governor Agust Martowardojo said yesterday that he expects inflation to stay below 4% in 2015.

- BI’s inflation target for 2015 is 3-5%. If oil prices remain low, inflation should continue to ease in coming months. This will indeed provide the leeway for BI to contemplate further rate cuts. BI surprised with a 25bp cut to 7.50% last month in what was seen as a reversal of the hike in November last year after the fuel price hikes. Our base case is for rates to be left unchanged near term to help stabilize USD-IDR. However, we could see BI lower rates further if 1) inflation undershoots and dips toward the lower end of the 3-5% target range; and 2) USD-IDR is stable ie it may continue to rise even above 13,000 but at a gradual pace and in line with the weakness in regional currencies. USD-IDR is holding just under the 13,000 this morning, around 12,970.