Maybank FX Monthly - Issue VI 2015

2015, Issue VI: Maneuvering Eurozone and China Risks in July

Key themes[1]

§  First, US Fed timeline for eventual rate hike remains data determined. US growth recovery remains on track but disinflationary pressures and external developments may delay the normalisation timeline. Key now would be: US dollar continues to see mild upside momentum. Rising US 10-year yields and bond volatility may continue to be tailwind for broad EM outperformance. Key US events:   NFP (2 July), ISM Manuf (1 July), Retail Sales (14 Jul), CPI (17 July), Durable Goods (27 July), Existing & New Home Sales (22 & 24 July) and 2Q GDP Advance (30 July) & FOMC Rate Decision (30 July). 

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§  Second, ongoing expectations of further monetary stimulus by BOJ in 2015 predicated on wage inflation and growth dynamics. Resolve to meet the target 2% inflation and expectations of further stimulus likely to affect the JPY.   Key event to watch out for is the Tankan survey results for 2Q that will come out on 1 Jul, which should confirm that the economy is on a gradual recovery path. BOJ meets to decide on monetary policy on 17 Jul, followed by the BOJ Governor Kuroda press conference. Minutes of the BOJ meeting on 18-19 Jun is due on 21 Jul.

§  Third, subdued core inflation, ongoing Greece tensions and structural headwinds in the Euro-area (high debt, possible fiscal slippages, slow reform, etc.) continue to weigh on the Euro. The large current account surplus the Euro-area has over its peers (UK, US) suggest there could even be scope for capital outflow without the Euro coming under intense pressure as inflows offset due to low valuations and rising M&A interest. Euro’s role as a funding currency also plays a part in supporting euro demand. EUR7bn in bond redemption to the ECB over Jul and Aug. It also needs to meet its monthly dues (about EUR1bn) to pay public sector wages and pensions in early-Jul. ECB meets on 16 Jul.

§  Fourth, ongoing reforms in China policies to address domestic, financial, and growth issues continue amid RMB internationalisation efforts.  With more yuan convertibility expected in its free trade zones over the next few months, PBOC is likely to keep the yuan strong until capital outflows start to ebb. China expected to keep base money growth solid (continued monetary easing with likely 25bp rate cut in 3Q and 50bp targeted RRR cuts and targeted measures to boost liquidity and credit in 2015) against a backdrop of stabilizing FX flows, without increasing abundant short term liquidity.

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§  Fifth, FX volatility remains elevated. Upward revisions to oil baseline scenario for 2015-2016 and risk of mildly higher agricultural commodity prices. Risk remains for EMs with external imbalances, as US yield volatility rise due to improvement in USD data. We revised 3Q & 4Q lower for the NZD, INR, and MYR vis-à-vis the USD. The EUR was revised higher for 3Q and 4Q.

^[1] Italicised and underlined words represent new developments in the FX themes.

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[1] Italicised and underlined words represent new developments in the FX themes.