Asia Daily Update

CHINA: PBoC set the USD-CNY fixing rate at 6.3975 this morning, compared with yesterday’s fixing rate at 6.4010 and closing rate at 6.3982. This is the first time this week that China’s central bank sets the CNY fixing rate to the stronger side of the previous closing rate. PBoC stated yesterday that there is no basis for further dramatic devaluation in CNY exchange rate, but also said the central bank will carry out effective management if the market is “distorted”. It appears that PBoC will not kick off another big movement in the USD-CNY exchange rate in the short term. From this perspective, the USD-CNY will likely stabilize somewhat in the short term.

- PBoC did a briefing on yuan yesterday. From the wording of PBoC officials, it appears that China’s central bank is trying to shifting to a more floating (still managed) exchange rate regime, which could give more discretion to the monetary policy. This will be a welcomed move by the IMF. PBoC officials said that the timing of a large deprecation of CNY fixing is due to increased money supply in July. As the supply of RMB increases, the RMB exchange rate is naturally under pressure to weaken. This is interesting, but could show that PBoC may do not want to see a surge of M2 growth, which was inflated due to the local government debt swap plan (conducted by MOF) plan and stock rescue package (conducted by China Security Regulatory Commission). On the other hand, this reflects that China could gradually shift to a more sophisticated approach to balance money supply, exchange rate and capital flows. PBoC said that it would promote the consistency between CNH-CNY. This is a precondition for further capital account openness, and will facilitate the SDR operation. The IMF mentioned earlier that the divergence between CNY and CNH will create operational issues as “deviations between the two rates imply that the CNH cannot be a perfect hedge for CNY-based exposures”.

From this perspective, we could see the CNY-CNH spread could narrow in the future. PBoC said ‘one-off’ adjustment has been done. It seems that the ‘one-off’ means the 4.6% deprecation in CNY fixing in the past three days. If this is the case, today’s adjustment in CNY fixing could be quite modest. In the past two days, the fixing was weaker than the previous closing. Let’s see whether today’s fixing rate will be stronger than today’s closing rate. On the medium to long term projection, it is more likely to see a gradual deprecation path in CNY exchange rate, given soft economic fundamentals. Volatility will definitely pick up. Forwards will be largely dependent on the rates differentials. Other than these, PBoC commits to extend the CNY trading hour to link to London/New York markets.

SOUTH KOREA: BoK kept rates on hold as expected for the second straight meeting at a record low of 1.5% yesterday. BoK said in its accompanying statement that any economic recovery would likely be aided by expansionary policies and improvement in domestic demand following the end of the MERS outbreak. Barring exceptional developments, we see BoK inclined to staying on hold for the rest of the year given the already high household debt levels.

TAIWAN: CBC yesterday stepped up its easing measures amid concerns over capital flight from the CNY devaluation. CBC reduced the rate on overnight certificates to 0.382% from 0.384%. At the same time, CBC raised the mortgage limits on luxury properties and third properties for individuals to 60% from 50% previously. Looking ahead, we see CBC maintaining an easing basis in its monetary policy stance given the recent weakness in economic performance.

South/Southeast Asia:

INDIA: The Upper House failed to pass the GST bill at the close of the session yesterday, raising investor concerns over Modi’s overall reform efforts. The government is still hopeful of passing the bill in the current sitting ahead of the November session. It is sounding out opposition parties on the possibility of a two-day session of Parliament in September ahead of the Bihar elections which could be announced by mid-September and held from mid-October. The government would need a 2/3 majority to pass the bill and in a chamber where it does not hold a majority. A delay would inevitably push back the April 2016 deadline for GST introduction.

On the data front, we get July WPI inflation today which is expected to remain in negative territory for the 9th consecutive month, seen close to -3% yy from -2.4% previously. We should also get July trade numbers in the next few days where exports are expected to contract for the 8th consecutive month. For USD-INR, it closed slightly higher yesterday by 0.4% to 65.10. The previous barrier of around 64.00-64.20 should now act as the immediate support and on the upside, the next key barrier is now seen around 66.00-66.20.

SINGAPORE: On the data front we get June retail sales today where the headline is expected to moderate to around 3.5% y/y from 6.1% previously. Excluding auto sales, the retail numbers are likely to remain soft and seen around 1% from 0.9% previously.

For USD-SGD, it held steady yesterday around 1.3970 after easing back from the 1.4150 high on Wednesday. For the SGD NEER, we estimate it is at -0.9% vs the mid-point for USD-SGD at 1.3970, USD-MYR at 4.0110, and USD-CNY at 6.3980. The +/-2% band around the mid-point corresponds to USD-SGD between 1.3580-1.4130, ceteris paribus.

MALAYSIA: Q2 GDP released yesterday was stronger than expected at 4.9% y/y (market: 4.5%) from 5.7% in Q1. The key drivers were 1) firmer than expected private consumption at 6.4% y/y from 8.8% in Q1. The pullback in private consumption was anticipated given the front-loading of household spending in Q1 ahead of the GST implementation in April; and 2) higher government spending at 6.8% y/y from 4.1% in Q1. The main drags on overall growth were 1) the slump in investment spending to 0.5% from 7.9% in Q1, owing in part to the political uncertainty and weak investor sentiment; and 2) sluggish exports which contracted further by 3.7% from -0.6% in Q1. For full year 2015, we could still see growth at around 5%, within the government’s 4.5 – 5.5% range.

- Bank Negara Malaysia (BNM) Governor Zeti Akhtar Aziz yesterday dismissed suggestions that the central bank could peg the MYR and impose capital controls to halt MYR’s freefall. On a year-to-date basis, the MYR has fallen 12.8%, making it the worst performing Asian currencies. This fueled speculations that capital control measures imposed in 1998 following the Asian Financial Crisis could be re-introduced. At the same time, she downplayed rumors that she was stepping down due to health reasons. Instead, she will serve out her full term till April-2016, and hinted that her successor could come from within. For USD-MYR, it eased back 0.4% yesterday to close around 4.0100. We look for consolidation today but the bias remains to the upside with the immediate barrier seen around 4.0500.

INDONESIA: IMF’s Senior Representative to Indonesia, Benedict Bingham, said yesterday that the cabinet reshuffle on Wednesday would add weight to President Widodo’s economic team. This follows the appointment of two technocrats in the Coordinating Ministry for Economy and Ministry of Trade. However, he was cautious on whether the appointment of the new Trade Minister could change the protectionist stance that the ministry has portrayed. President Widodo will make his first State of the Union address today, where he is expected to unveil new plans to revive the economy. For USD-IDR, it eased back slightly yesterday to the 13,770 level after surging to a high of the 13,900 level on Wednesday. The 14,000 barrier is now the next key psychological barrier.

PHILIPPINES: Bangko Sentral ng Pilipinas (BSP) kept its benchmark interest rate unchanged at 4% as widely expected yesterday. This was for the seventh straight meeting. Despite subdued inflation levels, Deputy Governor Gunigundo said that there was no need for additional monetary support given the resilience the economy.