Maybank FX Insight: ASEANs: Heating Up - 9 Jun 2015

ASEANS: Heating Up

      Three key factors that will be majors themes for the ASEANs in 2H 2015: (1) US dollar strength should intensify particularly as US Treasury yields start to rise, widening the spreads with ASEAN government bond yields; (2) EUR/USD-led volatility; and (3) commodity upswing as El Nino rears its ugly head again and as global oil prices begin to creep higher as demand recovers on the back of more entrenched global growth.

      Widening bond yield spreads that could spark a sell-off in ASEAN assets as seen in the recent outflow from Indonesia as well as the strengthening of the EUR as the Greek concerns fade and EU fundamentals come into play should weigh on the ASEAN currencies. The mild uptick in commodity prices as a result of El Nino could benefit agriculture producers but we doubt would be sufficient to offset the impact from widening bond yields and/or EUR strength.

      The three key factors should keep the ASEANs on their downward trajectory against the dollar. Among the ASEANs, we believe that the IDR will be the most vulnerable to any portfolio outflow brought about by the widening of US Treasury bond yields and domestic bond yields. Consequently, we have revised up our USD/IDR and USD/PHP projections to 13500 and 45.50 by 3Q15 and then to 13750 and 45.30 by 4Q15.