EN 
By Macro Hive in collaboration with SGX
SGX Asia Currencies Insights
- Rising geopolitical tensions are a risk to our bullish yuan view.
- Import compression and accelerating inflation both support a stronger INR.
- We turn positive on TWD, with improved tech sentiment and warming US-Taiwan relations.
- Accelerating vaccine rollout insufficient to shift our neutral view on KRW.
- S$NEER to remain above band’s midpoint on reopening and accelerating inflation.
SGX Commodities Insights (Iron Ore)
- Industrial commodities bounce back.
- Iron ore prices get an additional supply-related boost.
- Shipping rates move in lockstep with commodities.
- Tighter Chinese credit conditions point to lower prices ahead.
China Growth Tracker
- Iron ore prices reversed earlier losses and rallied 3% over the past two weeks, but their annual price growth remains unchanged.
- Oil prices, the Baltic Dry Index and Chinese bond yields also rose over the same period, mirroring the iron ore gains. However, annual price changes were more muted.
- Copper prices were the one market that saw clear declines, falling almost 6% over the past two weeks.
- Together, these signals suggest Chinese growth is potentially at a transition point lower.
- In our last report, we favoured buying iron ore (SCON1) and selling copper (LPN21). This worked well: iron ore outperformed by 9%. With such large moves, we turn neutral for now.
SGX Asia Currencies Insights
EUR Pullback Leaves USD Strength Against Asia FX
Moderate USD strength through June has prevented our expected gains for Asia FX this month from playing out. Continued gains in commodity prices have meant only those currencies with improving terms of trade, such as BRL, RUB and COP, have strengthened. Even here, gains have been small. But rather than any broad EM weakness, June’s performance reflects more of a pullback in the euro. Month-to-date Asia FX is stronger versus EUR (except for INR), with the ECB retaining its dovish stance last week. Stepped-up PEPP purchases will continue through Q3 to ensure financing conditions remain conducive to supporting the recovery and to ensure medium-term inflation is close to target.
Overall, we see some of the recent dollar strength as noise around longer-term trend weakness, and Asia FX remains on track to record gains for Q2. June’s weakness is small in magnitude, and we remain constructive on CNH and INR while turning positive again on TWD. Our neutral stance on KRW remains unchanged given ongoing equity outflows.
Spotlight View #1: Upcoming CPC Anniversary Points to Near-term Yuan Stability
After appreciating to its strongest level in three years in late May/early June, CNH has relinquished some gains. But at 6.40 on USD/CNH, the yuan remains close to levels last seen in late 2018, and the CFETS basket the strongest since 2016. Discussion over the PBoC tolerance for ongoing appreciation has eased back with the recent weakness, but the fundamental support for yuan strength remains the same. An ongoing recovery, C/A surplus, inflows related to the October WIGB inclusion and China’s favourable yield pickup are all still in play.
China’s declining growth differential versus the rest of the world will continue running as a theme, but it should not impede further currency strength. The Citi Economic Surprise Index for China has tipped into negative territory for the past month, versus ongoing gains in the global and EM aggregates (Chart 1). China’s credit impulse turned negative as of May, with total social financing around 60% of last year’s level. And with the lowest inflation in EM, concerns linger on the underlying strength of the domestic economy (Chart 2).
Below-consensus data on May retail sales (12.4% YoY), IP (8.8% YoY) and FAI (15.4% YoY) will add to concerns over the recovery. We view the data misses as partly related to exceptionally high seasonal volatility from last year’s COVID shutdown coupled with a shifting of various holidays and consumption patterns. And the first in, first out dynamic for China also meant expectations over a continued robust growth performance were raised earlier than for others.
Overall, we remain confident on China’s continued, if unspectacular, recovery this year. Rapid vaccine rollout should support the domestic recovery, while bumper growth rates in the US and elsewhere should ensure still-strong appetite for Chinese exports. At 27.9% YoY, May exports underperformed versus consensus, as did imports, and followed a contraction in new export orders in the May PMI survey. But with the trade surplus at a four-month high of $45bn, and $611bn on a 12-month rolling basis, China can afford some moderation in its trade surplus without tipping the C/A (currently in surplus of 2.5% of GDP) into deficit. For CNH, this suggests further appreciation, but slower than that seen over the past year. At 2% YTD, yuan appreciation is now slightly below TWD’s 2.3%. But at 10.8% over the past 12 months versus 7.2% for TWD, it has been the fastest in Asia.
PBoC Policy Quiet for Now
We discussed in an earlier note that the 1 July 100th anniversary of the Communist Party is expected to coincide with broad currency and financial market stability. So while the PBoC have taken various measures over past months to encourage two-way moves in the yuan, we expect any new policy measures to be on hold for now. Contrasting the decline in US Treasury yields through June, 10-year CGB yields have increased. This follows a recent eight-month low and leaves the spread to Treasuries at its highest since March, around 165bps.
Still Bullish CNH, But Geopolitics a Risk
With little changed on China’s fundamentals, we stay constructive on CNH. Ongoing export strength and attractive yield pickup leaves flows remain supportive of FX appreciation. And with the yuan still some way above the pre-trade war low of 6.25, we continue to see scope for further strength.
And while we still see a slow grind lower in USD/CNH, we highlight rising geopolitical risks. US-Taiwan relations are warming. And a recent G7 statement highlighted ‘the importance of peace and stability across the Taiwan Strait’ – the first ever mention of Taiwan in a G7 statement. This triggered China’s largest ever military incursion into Taiwanese airspace earlier this week. Previous incursions had already prompted warnings from the US under Joe Biden’s residency. And with talks set to begin on a US-Taiwan Trade and Investment Agreement, and the G7 also pointing out China’s poor record on human rights, US-China tensions could escalate.
Spotlight View #2: Declining RBI Intervention to Allow Stronger INR
The rupee’s status as the worst-performing Asian currency MTD contrasts the improving macro backdrop. Mobility has improved sharply as restrictions ease, unemployment has dropped back from recent highs, and earlier production shutdowns have ended. Strong appreciation in May has partially reversed, with the currency now slightly weaker so far in Q2. Rupee performance is not significantly out of line with elsewhere in Asia, however, with modest dollar strength the main driver. USD/INR around 73.3 is less than 1% weaker versus the start of June and leaves SGX INR/USD futures at 136.5. We remain cautiously bullish on the rupee, with the trade deficit remaining contained and above-target inflation capping RBI appetite for any rupee weakness.
Accelerating Inflation Will Slow RBI FX Intervention
May inflation at a higher-than-expected 6.3% YoY (and the highest since November 2020) will not shift the RBI’s resolute pro-growth stance. The 4 June MPC statement reiterated that the RBI would ‘continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis… while ensuring that inflation remains within the target going forward’. To the extent that RBI forecasts remain within target and household inflation expectations reasonably contained, above target inflation will be tolerated for now. The supply-driven nature of inflation (the fuel component remains in double digits) also leaves moderate core inflation (5.4% YoY in April). Yet WPI at an all-time high of 12.9% YoY will create ongoing concerns over passthrough from input prices to consumer prices, or alternatively a hit on corporate profit margins.
Accelerating inflation through H2 2020 (calendar basis) did not dent rupee performance; nor should it this time. The policy rate is set to remain at 4.0%, and RBI QE combined with ongoing OMOs will keep 10-year yields firmly anchored around 6.0%. Yields spiked moderately to 6.04% after the CPI release earlier this week, but compared with the 6.24% high in yields in March, this move was small. India’s real policy rate now stands at -2.2%, significantly below the +1.8% in Indonesia. The gap on real yields is even more pronounced, with India around -0.3% and Indonesia at +4.7%. But with around just 2% of India’s government bonds held by non-residents, versus more than 20% in Indonesia, we do not expect declining yield support to be a significant driver of near-term rupee performance.
INR will instead be driven more by central bank policy preference, with the currency used to tighten monetary conditions. RBI FX intervention looks to have stepped up significantly through late May and early June, with reserves up by $5bn through the week of 28 May and another $7.4bn through the week of 4 June. Total RBI reserves now stand at $605bn, with FX reserves at $560bn. With standard metrics such as reserves/imports or reserves/short-term external debt very high, the RBI has very significant firepower to guide the rupee stronger. We expect them to use it, should the need arise.
COVID-Related Import Compression Supports a Stronger Rupee
A lower-than-expected trade deficit in May supports our cautiously constructive stance on INR. The $6.3bn deficit was the lowest for eight months and leaves the rolling 12-month deficit $27bn narrower than a year earlier, at $110bn. Imports fell MoM as COVID-related restrictions hurt demand for key items such as gold ($679mn vs $6.2bn in April) and fuel ($9.5bn vs $10.9bn in April). India’s fuel bill has increased since the early 2021 lows (12-month rolling basis), but the gain has lagged the sharp rise in prices, reflecting the drop in demand. Ongoing reopening will mean this starts to reverse. However, India’s inward-looking trade policy and shift away from imports from China will contain the widening of the trade deficit. And combined with a surplus on the services side and ongoing portfolio inflows, the BoP dynamics should be rupee positive.
COVID-Related Import Compression Supports a Stronger Rupee
Fresh highs in the SENSEX and the NIFYT this month suggest little concern over lasting effects from the recent COVID crisis or rising input prices. New daily COVID cases are down at around 70,000, versus the peak of over 400,000 in early May. Vaccine rollout is finally on an upward trend, with around 3mn doses administered daily. And mobility is much improved, with the Google series showing all components up sharply. Weekly unemployment data also shows a drop to 8.7% through 13 June, versus 13.6% through 6 June. And foreign inflows into India’s equity market are significantly
improved versus April (outflow of $1.5bn) and May (inflow of $750mn), with MTD inflows at $1.4bn.
With equity inflows set to continue, the trade deficit remaining contained despite higher oil, the services surplus remaining robust and the recovery gathering steam, we stay cautiously bullish on the rupee. Recent RBI intervention should ease back to allay inflationary pressures, and we continue to expect USD/INR to drop back towards 72 and SGX INR futures towards 138.
Spotlight View #3: TWD – Reinstating a Constructive Stance
Modest weakness MTD has been insufficient to shift USD/TWD from multi-decade lows. At 27.61 on 11 June, the currency marked another 24-year low and is currently trading only slightly weaker at 27.65. SGX TWD/USD futures remain just below 0.365, versus the early January high of 0.37, and one-month NDFs are trading just above the recent all-time low at 27.5. Taiwan’s economic fundamentals remain strong. And combined with improving US-Taiwan relations and limited impact from COVID on the country’s semiconductor industry, the Taiwanese dollar continues to look attractive. We had been neutral recently due to volatile tech sentiment and significant equity outflows. But with the worst of the COVID crisis past and equity flows turning positive, we are once again bullish on TWD.
Still-Strong Exports and Improved COVID Situation Leaves Fundamentals Intact
Taiwan has extended its soft lockdown until 28 June, with new daily COVID cases remaining around 200 (versus a peak of over 600 in late May) and cases being identified around the country. Mobility has dropped, and the domestic recovery could well face delay. But the country has avoided a full lockdown, and its semiconductor industry remains relatively insulated (barring small outbreaks at packaging and testing factories and within migrant worker communities). Therefore, Taiwan’s predominantly export-driven growth dynamic is unlikely to be interrupted. And consequently, the large C/A surplus and resulting appreciation pressure on the TWD is expected to be unaffected.
May exports came in at 38.6% YoY despite the COVID outbreak and power outages through the month. This was significantly higher than the 30.5% consensus, with tech exports remaining robust. Ministry of Finance projections see $100bn in exports through Q2 (versus $79.3bn in Q2 2020) on the back of strong global growth. They also see demand for 5G keeping appetite for the country’s tech products strong for some time ahead.
Another potentially significant support for exports is renewed trade and investment talks between the US and Taiwan. US Secretary of State Antony Blinken said earlier this month that ‘some kind of framework agreement’ with Taiwan would soon be discussed, and the US Trade Representative Katherine Tai has subsequently said a meeting would be held ‘in the coming weeks’. Timing on any agreement is unclear. But progress towards the agreement, a recent visit to Taiwan by several US senators, and the US provision of 750,000 COVID vaccines to Taiwan all signal an increasing warmth in US-Taiwan relations. Such an agreement could also have significant geopolitical implications, providing a very concrete example of distancing from China.
Chinese interference in supply agreements is reportedly a reason behind Taiwan’s exceptionally slow vaccine rollout. At just 3.6 doses per 100 people, Taiwan’s vaccine coverage starkly contrasts the global average of 31.0 and 62.8 in China. The US donation combined with Japan’s recent donation of 1.2mn vaccines (which also risked angering China) should mean the vaccine rollout starts to accelerate.
Renewed Equity Inflows Bullish for TWD
Taiwan’s 14% of GDP C/A surplus and limited avenues for capital account recycling leaves a structurally TWD-positive BoP. Significant equity outflows are the main risk and one often evident in recent months as US yields initially climbed higher, with an adverse effect on tech sentiment. After a drop of around 10% in the TAIEX in mid-May (and choppiness through Q1), Taiwan’s stock market now looks to be on a firmer footing. The index is just 1% below the April high and has broadly followed performance in other tech stocks. With the US Federal Reserve expected to remain dovish, a repeat of the Q1 rates selloff is unlikely, and we see more contained risks for the TAIEX and the Taiwanese dollar going forward.
CBC to Remain Tight Lipped on Currency Policy
An eight-year high on inflation is unlikely to shift the CBC’s accommodative stance at the upcoming monetary policy meeting. Core inflation remains subdued at just 1.6% YoY, versus 2.5% on headline CPI, and the domestic recovery faces downside risks from the COVID restrictions. Updated forecasts for GDP growth will be released and are nevertheless expected to be revised upwards. Projections from March saw this year’s GDP growth at 4.53% (broadly in line with current consensus forecasts), while Taiwan’s DGBAS recently revised up its forecast to 5.46%. Given this follows GDP growth of 3.1% last year, the fastest of any major economy, Taiwan’s 2020-21 economic performance will be one of the best globally, after China.
Material commentary on TWD in the CBC statement is unlikely, past the usual commitment to maintaining an ‘orderly’ foreign exchange market. Reserves accumulation has been moderate after a spike in Q4, given the C/A offset from equity outflows. But with warmer relations with the US, we expect the CBC to ease back on previously sizeable intervention and expect TWD to trend appreciate. We reinstate a bullish stance on the currency and see USD/TWD breaking below 27towards levels of the early 1990s.
Rest of Asia FX
KRW – Improving Domestic Outlook Insufficient to Shift Neutral Won View
KRW continues to lag others in Asia. Mid-June strength has reversed, leaving USD/KRW back around 1117 – the worst performance in Asia after THB. SGX KRW/USD futures remain stuck around 0.89, with any return towards the January highs of 0.92 unlikely for now. Equity inflows have yet to resume, and we remain neutral on the won despite the supportive global backdrop.
Significant acceleration in Korea’s vaccine rollout supports a continued recovery in the domestic economy. The country’s 30.9 vaccines per 100 people roughly equals the world average, contrasting a month ago when it was just half. Korea relaxed some COVID restrictions earlier this week, and mobility is much improved from the January lows. Updated guidelines due next month are expected to see remaining restrictions relaxed. Above-target inflation and strengthening domestic demand will keep the discussion over BoK rate hikes in focus and leave increasingly favourable yield support for the won.
As well as improving domestic momentum, the external backdrop also supports the won. Exports for the first 10 days of June increased 40.9% YoY following a 45.6% gain in May. Korea’s 5% of GDP C/A surplus should therefore remain intact, even allowing for some normalisation in tech demand and exports.
Ongoing equity outflows, albeit slower than the exceptionally large outflows through May, have nevertheless continued to weigh on the won. The Kospi hit fresh all-time highs this week, and sentiment around tech has improved. But until foreign equity inflows look secure, we remain neutral on KRW.
SGD – S$NEER to Remain Above Band’s Midpoint
S$NEER continues to trade above the midpoint of the band. An easing of mobility restrictions earlier this week and rising inflation bring the prospect of a tightening of MAS policy in October back into play. Versus the dollar, SGD is marginally weaker MTD at 1.326 and broadly in line with moves in TWD and CNH.
The latest MAS Survey of Professional Forecasts saw expectations for this year’s GDP growth revised upwards. From a projected 5.8% in the March survey, respondents now see the Singaporean economy expanding 6.5% this year. Upgraded expectations for manufacturing and non-oil domestic exports mainly drove the revision. Inflation forecasts were also revised higher with headline CPI now expected at 1.4% in 2021, from 0.9% in the March survey. Forecast revisions for the more policy-relevant core inflation were modest, with this year’s 0.8% only 0.1pp higher than in the March survey and 0.2pp higher than April’s 0.6% reading.
USD/SGD should resume its move lower given our expectation for broad dollar weakness. Further NEER gains will probably be contained for now with the reopening still incomplete. Any significant overshoot on core inflation would shift this view, however. A return to an appreciation bias by MAS is probably unlikely before next year, but we do not entirely rule out an October shift.
SGX Commodities Insights (Iron Ore)
Retesting the Highs
With the notable exception of the major grains, most global commodity prices have bounced again lately – in some cases retesting their prior highs (Chart 1). Energy prices, both oil and gas, are closing in on their peaks from early 2019, well before the Covid scare arrived (Chart 2).
Final steel demand now appears to be cooling due to the tightening of credit conditions in China earlier this year. However, a sudden rash of supply issues has supported prices in recent days. These include various operational accidents in China and Brazil, which by some estimates will result in around 30mn tonnes of annual supply being lost.
Not in itself a large number relative to total output, it is important to remember that prices are set at the margin. Traders have responded, with the benchmark 62% fines SGX iron ore active futurerising sharply to over $210/tonne. Coking coal has bounced in tandem.
Reflecting generally strong global commodity demand, shipping rates have bounced in tandem. The Baltic Dry Index, which traded down in near-lockstep with iron in the prior weeks, remains tightly tied to ore. Sinking as low as 2420 earlier this month, it has subsequently recovered to nearly 2860.
Keeping the broader macro picture in mind remains important. The DXY dollar index is hovering near recent lows at around 90. A break lower would imply higher commodity prices generally. Global inflation rates continue to rise sharply, including at the producer and wholesale level. Reports of supply bottlenecks for raw, intermediate and finished goods remain widespread. In such an environment, businesses can easily confuse temporary price swings with reliable indicators of final demand. Indeed, if credit conditions are a guide, Chinese final demand is now cooling rapidly, with
clear implications for prices over coming months.
China Growth Tracker
Macro Hive research for SGX has found that iron ore, along with several other commodity and bond markets, tracks Chinese growth closely. Therefore, these markets can indicate future reported Chinese growth. And divergences across them can be exploited. Here are their latest developments:
- Iron ore prices reversed earlier losses and rallied 3% over the past two weeks, but their annual price growth remains unchanged (Chart 1).
- Oil prices, the Baltic Dry Index and Chinese bond yields also rose over the same period, mirroring the iron ore gains. But annual price changes were more muted (Charts 2 to 4).
- Copper prices were the one market that saw clear declines, falling close to 6% over the past two weeks (Chart 1).
- Together, these signals suggest Chinese growth is potentially at a transition point lower.
- In our last report, we favoured buying iron ore (SCON1) and selling copper (LPN21). This worked well: iron ore outperformed by 9%. With such large moves, we turn neutral for now.
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